Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 2012, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum’s 2012 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 2012, Baum recorded the following information:
Business expenses:
Optics cost of goods sold
$35,000
Optics rent expense
28,000
Liability insurance premium on Optics
5,250
Other expenditures:
Baum’s self-employment tax
29,750
Baum’s self-employment health insurance
8,750
Insurance premium on personal residence. In 2012, Baum’s home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During 2012, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year.
2,625
Qualified 2012 mortgage interest on a loan to acquire a personal residence
52,500
Annual interest on a $70,000 5-year home equity loan. The loan was secured by Baum’s home, obtained on January 2, 2012. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use.
3,500
Points prepaid on January 2, 2012, to acquire the home equity loan
1,400
Real estate taxes on personal residence
2,200
Estimated payments of 2012 federal income taxes
13,500
Local property taxes on the car value, used exclusively for personal use
300
What amount should Baum report as 2012 net earnings from self-employment?
A. $273,000
B. $260,196
C. $243,250
D. $252,000
I am bit confused here how do they get self employed tax to be 9.235 ? Isn't it 6.2 and 1.45 = 7.65 ?
Answer (B) is correct.
The net profit or (loss) from self-employment is the gross business receipts reduced by the business expenses. The net profit or (loss) therefore should be $281,750 ($350,000 gross business receipts – $35,000 cost of goods sold – $28,000 rent expense – $5,250 liability insurance premium). Line 4 on Schedule SE requires the tax preparer to multiply the net profit or (loss) by .9235 ($281,750 × .9235 = $260,196). The net earnings from self-employment should be $260,196.
FAR 05/27/14; 786/110 - Done !
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