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Calculate business income, self employment tax and AGI

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1. Robert, the Sole Proprietor of a consulting business, has gross receipts of $500,000 in 2006. Expenses paid by his business are:

a. Advertising $ 2,500
b. Employee Salaries 150,000
c. Office Rent 24,000
d. Supplies 18,000
e. Taxes and Licenses 17,000
f. Travel (other than meals) 3,800
g. Meals and Entertainment 2,400
h. Utilities 3,800
i. Employee Health Insurance Premium 6,600
j. Health Insurance Premiums for Robert 2,200

Robert purchased a new car for this business on May 15 at a cost of $28,000. He also
Purchased $50,000 of new 5-year equipment and $70,000 of used 7-year fixtures on
August 1. Robert drove the new car 10,000 miles (8,000 for business and 2,000 personal
Miles). He paid $200 for business-related parking and tolls. He also paid $1,000 for
Insurance and $1,200 for gasoline and oil for the new car. He would like to maximize his
Deductions.

a. What is Robert's net income (loss) from his business?
b. How much self-employment tax must Robert pay?
c. If this is Robert's only source of income, what is his adjusted gross income?

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Solution Summary

The 300+ word solution presents a step-by-step process to calculation business income, self employment tax, and finally AGI. It isn't as easy as it sounds because of optional treatment and various limitations imposed by tax code.

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Schedule C Income is calculated as follows:

Step one: Gross 500,000 - 2500 - 150000 - 24000 - 18000 - 17000 - 3800 - (2400 / 2) - 3800 - 6600 = 273,100
Step two: depreciation using book methods, not tax. Five year equipment $50,000 / 60 months x 5 months = $4167
Seven year equipment $70,000 / 84 months x 5 months = 4167
Auto $28000 x 80% bus use = $22,400 / 60 months x 7.5 months = $2800
Step three: auto expenses = ...

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