Question

Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss items for the current year:

Sales	$650,000
Corporate dividend (from 5% owned corporation)	60,000
Municipal bond interest	25,000
Long-term capital gain	0
Short-term capital loss	(8,000)
Cost of goods sold	320,000
Depreciation	65,000
Nondeductible fines	4,000
Advertising	7,000
Utilities	6,000
Rent	5,000

Furthermore, Sunshine’s liabilities (all recourse) increased from $0 on 1/1 to $300,000 on 12/31 of the current year.

1. Assume that Sunshine Company is owned by Alvin as a sole proprietorship. Alvin received $2,400 per month ($28,800 in total) from Sunshine Company as an owner’s draw. Additionally, Alvin took $55,000 out of Sunshine Company near the end of the year as a partial distribution of profits. (11 points)
   1. Calculate the net business income of Sunshine Company/Alvin that would be reported on Schedule C of Alvin’s Form 1040.
   2. How much of the $2,400 per month ($28,800 total) and the $55,000 distribution would Alvin include as taxable income on his Form 1040?
   3. What amount of Alvin’s income will be subject to self-employment tax?
   4. Note that you do not need to complete Schedule C or other forms, but these form will be a useful guide in completing this portion of the assignment.                       

Answer 1

a. Calculation of Net Business Income as per Schedule C to FORM 1040

Part I Income
Gross receipts or sales	$6,50,000
Cost of goods sold	$3,20,000
Gross profit.	$3,30,000
Other Income	$0
Gross Income	$3,30,000
Part II Expenses.
Depreciation	$65,000
Advertising	$7,000
Utilities	$6,000
Rent	$5,000
Total Expense	$83,000
Net Profit	$2,47,000

Note- If tax payer receive over $1,500 of taxable ordinary dividends, he must report these dividends on Schedule B

b. A draw doesn't affect Taxpayer business taxes because a business is taxed on the business net income - the income of the business minus expenses. A draw isn't an expense of the business. From an accounting and tax purpose, the draw is a distribution of income.

Therefore no tax implication of $2,400 per month ($28,800 total) and the $55,000 withrawal by Alvin on taxable income on his Form 1040. ( not taxable)

c. Net profit or (loss) from Schedule C is subject to self employment tax. Maximum amount of combined wages and self-employment earnings subject to social security tax.

Hence $132900 is subject to self employment Tax.