HRB-27 Final Exam Review

What income reporting form should an independent contractor sometimes receive from the person who paid him for his services? Form 1099-MISC (15.6) Schedule C, Line F asks for the accounting method used in the business. What is the difference between the cash method and the accrual method of accounting? • Under the accrual method, total sales and total charges for services are included in income even though payment may be received in another tax year. • Under the cash method, only income actually received or expenses actually paid during the year are included. (15.5) What does it mean if a proprietor "materially participates" in the business? He is active in running the business in a substantial way on a day-to-day basis. (15.5) Why is it important to know whether or not the proprietor materially participates? If the proprietor does not materially participate, any loss from the business is a passive loss and generally may be currently deducted only against passive income. (15.6) What are returns and allowances? • Amounts that were refunded to customers who returned merchandise for refund or partial refund. • These amounts are subtracted from gross receipts. (15.6) How is cost of goods sold determined? Beginning inventory plus purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or preparation for sale, minus ending inventory. (15.7)