Preparing the Return for Susan J. Brown Susan J. Brown owns and operates Family Fashions, a ready-to-wearclothing shop. She uses an accrual method of accounting and files herreturn on a calendar year basis. Five employees worked in her shop during the year. She filed allthe necessary employment tax forms and made the required tax deposits.See Publication 15,Circular E, Employer's Tax Guide. Schedule C First, Susan fills in the information required at the top ofSchedule C. She starts by entering her name and social securitynumber. Then she completes lines A through H. Line A.She enters her principal business. Line B.She enters 448140, which is the 6-digit business code for a familyclothing shop. She found the code on page C-9 of theinstructions for Schedule C. Susan locates the major business categorythat describes her business. She reads down the items under "RetailTrade" to find 448140--"Family clothing stores." Line C.She enters the name of her business--"Family Fashions." Line D.She enters her employer identification number (EIN). She has tohave an EIN because she has employees. For information about EINs, seeIdentification Numbers in chapter 1. Line E.She enters her business address. Line F.She checks box 2 for accrual method of accounting. Line G.Susan checks "Yes" because she materially participated in herbusiness during the year. The material participation rules areexplained in the Instructions for Schedule C. Line H.She leaves the box blank because she did not start or acquire herbusiness during the year. Part I--Income andPart III--Cost of Goods Sold Susan enters items of income in Part I. Line 1.Susan enters her total sales of $397,742 for the year. Line 2.She enters the refunds she gave on merchandise her customersreturned, as well as other adjustments she made to customers'purchases. They total $1,442. Line 4.Susan uses Part III on page 2 of Schedule C to figure her cost ofgoods sold. Part III, line 35.Her inventory at the beginning of the year, $42,843, is the same asher inventory at the end of last year. This figure matches the amounton Part III, line 41 of her last year's Schedule C. Part III, line 36.The total cost of goods she bought to sell to customers, minus thecost of the goods she returned to her suppliers, was $241,026. Fromthis stock, she withdrew clothing and accessories for her own use thatcost $774. She subtracts the cost of these items from her totalpurchases to figure net purchases of $240,252. Part III, line 40.She adds her net purchases to her beginning inventory. This sum isthe total goods Susan had available for sale during the year. Part III, line 41.Susan's inventory at the end of the year was $43,746. Part III, line 42.Susan subtracts her inventory at the end of the year (line 41) fromthe goods that were available for sale (line 40) to get the cost ofgoods sold during the year. For more information on inventories andcost of goods sold, see chapter 6. Line 5.Susan's gross profit, $156,951, is the difference between her netsales (line 3) and the cost of goods sold (line 4). Line 7.Because Susan did not have any income to report on line 6, thegross income is the same as the gross profit (line 5). Part II--Expenses Susan enters her expense items in Part II. Line 8.Susan paid $3,500 for ads. Line 9.During the year, Susan determined that she would not be able tocollect $479 from bad checks and deducted this amount as bad debts.See chapter 8. Line 10.She used her van 75% for business during the year. She spent atotal of $3,000 for gas and oil. She can deduct 75% of $3,000 or$2,250 for gas and oil. Other van expenses include $713 (75% of $950)for insurance, $812 (75% of $1,083) for repairs and upkeep, and $75(75% of $100) for tags. She enters the total, $3,850, on line 10. Line 13.Susan enters the $4,277 depreciation from Form 4562, discussedlater. Line 15.Susan's $238 deduction is for insurance on her business property(van insurance is included in line 10). The deduction is only forpremiums that give her coverage for the year. Line 16b.Susan had borrowed money to use in her business. The interest onthese loans was $2,633 for the year. Line 18.The $216 Susan paid for postage during the year is her only officeexpense. Line 20b.Her rent for the store was $1,000 a month, or $12,000 for the year. Line 21.She had her store counters refinished and other painting was doneat a total cost of $964. Line 22.She spent $1,203 on supplies. Line 23.Susan renewed her business license and paid property tax on herstore fixtures. She also paid the employer's share of social securityand Medicare taxes for her employees, and paid state and federalunemployment taxes. She enters the total of all these taxes, $5,727,on this line. See Taxes in chapter 8. Line 25.Susan's total expense for heat, light, and telephone for the yearis $3,570. Line 26.Susan paid her employees a total of $59,050 for the year. She doesnot include in wages any amounts she paid to herself or withdrew fromthe business for her own use. Line 27.Susan enters the total of her other business expenses on this line.These expenses are not included on lines 8-26. She lists thetype and amount of the expenses separately in Part V of page 2, andcarries the total entered on line 48 to line 27. See chapter 8forexpenses you can or cannot deduct. Line 28.Susan adds all her deductions listed in Part II and enters thetotal on this line. Line 29.She subtracts her total deductions (line 28) from her gross income(line 7). Susan has a tentative profit of $51,166. Line 30.Susan did not use any part of her home for business, so she doesnot make an entry here. Line 31.Susan has a net profit of $51,166 (line 29 minus line 30). Sheenters her net profit here, on line 12 of Form 1040, and on line 2,Section A of Schedule SE (Form 1040). Line 32.Susan does not have a loss, so she skips this line. If she had aloss and she was not "at risk" for all of her investment in thebusiness, the amount of loss she could enter on line 12 of Form 1040might be limited. For an explanation of an investment "at risk,"see the Schedule C instructions for line 32. Form 4562--Depreciationand Amortization Susan figures her depreciation for the year on Form 4562. Lines 1 through 13.On May 19, Susan bought a $200 adding machine and placed it inservice on that same day. She chose to deduct its cost as a section179 deduction. See Publication 946,How To Depreciate Property,for information about the section 179 deduction. Line 15b.On May 19, Susan also bought and placed in service some clothingracks. They cost $800. She uses the Modified Accelerated Cost RecoverySystem (MACRS) to figure depreciation. The racks are 5-year property.Susan figures depreciation using the half-year convention and the 200%declining balance method. See Publication 946for information aboutMACRS. Line 19.Susan enters $1,117 for depreciation on assets she purchased before1987. For items bought after 1980 and before 1987, she uses theregular Accelerated Cost Recovery System (ACRS) percentages. For itemsbought before 1981, she uses the straight-line method. See Publication 534, Depreciating Property Placed in Service Before 1987,for information about ACRS. Line 20.Susan enters the depreciation on listed property from line 26(explained next). Lines 24 and 26.On March 20, Susan bought a van that she placed in service in herbusiness. The van weighs over 6,000 pounds; therefore, it is not apassenger automobile for the special deduction limits. The van is5-year property. She figures depreciation using the 200% decliningbalance method and applying the half-year convention under MACRS. Thevan cost $18,667. Her basis for depreciation is 75% of $18,667, or$14,000, because only 75% of the total miles she drove during the yearwere business miles. Susan does not choose to deduct any part of thecost of the van as a section 179 deduction. Lines 28 through 34.Because Susan is a sole proprietor, she must complete lines 28through 34. Line 21.Susan has a total depreciation deduction of $4,277. She enters herdeduction here and on line 13 of Schedule C. Schedule SE--Self-Employment Tax After Susan prepares Schedule C, she fills out Schedule SE. Shestarts by entering her name and social security number at the top ofthe schedule. Then she reads the chart on page 1 of the schedule whichtells her she can use Section A--Short Schedule SE tofigure her self-employment tax. She fills out the following lines inSection A. Lines 2 and 3.She enters $51,166. This is her net profit from line 31 of ScheduleC. Line 4.She multiplies $51,166 by .9235 to get her net earnings fromself-employment ($47,252). This is the amount of her net profitsubject to self-employment tax. Line 5.Because the amount on line 4 is less than $72,600, Susan multipliesthe amount on line 4 ($47,252) by .153 to get her self-employment taxof $7,230. She enters that amount here and on line 50 of Form 1040. Line 6.She multiplies the amount on line 5 by .5 to get her deduction forone-half of self-employment tax of $3,615. She enters that amount hereand on line 27 of Form 1040. Form 1040 Susan fills out Form 1040 as follows: Name, address, and social security number.Susan enters her name, home address, and social security number. Presidential election campaign fund.Susan chooses to have $3 go to this fund. She checks the box under"Yes." Line 1.Susan checks the box on this line because she is filing as single. Lines 6a and 6d.Susan claims an exemption for herself. She checks the box next to"Yourself" and enters "1" in the far right-hand entry space.She also enters "1" in the box on line 6d. Line 8a.Susan enters $388 of taxable interest that was credited to herpersonal savings account for the year. Line 9.Susan enters $100 of dividends she received from CBA Corporation. Line 12.She enters her business net profit from line 31 of Schedule C. Line 22.Susan adds the amounts on lines 7 through 21 and enters the total,$51,654. Line 27.Susan enters one-half of her self-employment tax. She got thisamount from line 6 in Section A of Schedule SE. Line 28.Susan enters $1,440 as her deduction for her health insurance. Thisis 60% of her $2,400 in health insurance premiums for the year. Line 29.Susan enters her simplified employee pension (SEP) deduction of$2,264. She figures her deduction by using Publication 560,Retirement Plans for Small Business (SEP, SIMPLE, and KeoghPlans). Line 32.Susan adds the amounts on lines 23 through 31a and enters thetotal, $7,319. Line 33.Susan subtracts the amount on line 32 from the amount on line 22 toarrive at her adjusted gross income, $44,335. She also enters thisamount on line 34. Line 36.She enters $4,300. This is the standard deduction for a singlefiler. Line 37.Susan subtracts line 36 from line 34 to get $40,035. Line 38.She multiplies $2,750 by the number of exemptions claimed on line6d to get her total exemptions, $2,750. Line 39.Susan subtracts line 38 from line 37 to get her taxable income,$37,285. Line 40.Susan uses the Tax Table in the Form 1040 instructions to figureher income tax. In the Tax Table she looks for the income bracket thatincludes $37,285. She finds the bracket for incomes of at least$37,250, but less than $37,300 and sees that the tax for a personfiling as single is $7,090. She enters this amount here. Lines 48 and 49.Because Susan does not have any of the credits listed on lines 41through 47, she enters -0- on line 48, subtracts it from line 40, andenters $7,090 on line 49. Line 50.She enters $7,230 from line 5 in Section A of Schedule SE. Line 56.Susan adds the amounts on lines 49 through 55 and enters the total,$14,320. Line 58.She enters $14,267 estimated tax payments she made for the year. Line 64.She enters $14,267. Line 68.Susan subtracts line 64 from line 56 to get the amount of tax sheowes, $53. She writes a check payable to the United States Treasuryfor $53. On the check she writes her social security number, herdaytime telephone number, and "1999 Form 1040." Her name andaddress are printed on the check. She sends her payment with Form1040-V, Payment Voucher (notillustrated). She fills out that form and sends it to the IRS with hercheck and tax return. Signing and assembling the return.She signs her name and enters the date signed and her occupation.She makes a copy of the return, schedules, and form for her records.Then she assembles her original Form 1040, Schedules C and SE, andForm 4562 in that order. (See "Attachment Sequence Number" in theupper right corner of each schedule or form.) Finally, she mails it tothe IRS. Susan J. Brown's Form 1040, pg 1 Susan J. Brown's Form 1040, pg 2 Susan J. Brown's Schedule C (Form 1040), page 1 Susan J. Brown's Schedule C (Form 1040), page 2 Susan J. Brown's Schedule SE, page 1 Susan J. Brown's Form 4562, page 1 Susan J. Brown's Form 4562, page 2