Michael operates his health food store as a sole proprietorship out of a buildin
ID: 2561974 • Letter: M
Question
Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information regarding Year 6, compute his net self-employment income (for SE tax purposes) for Year 6.
Gross receipts $100,000
Cost of Goods Sold 49,000
Utilities 6,000
Real estate taxes 1,000
Gain on sale of business truck 2,000
Depreciation expense 5,000
Section 179 expense 1,000
Mortgage interest on building 7,000
Contributions to Keogh retirement plan 2,000
Net operating loss (NOL) from Year 5 10,000
a. $24,000
b. $16,000
c. $31,000
d. $14,000
Explanation / Answer
ans) (a) $24,000
Net earnings from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The gain on sale of business truck is not self-employment income since gain on saleof business truck is not Michael ordinary course of business . Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Michael net self-employment income is computed as follows:
Gross receipts = 100,000
Less: Cost of goods sold = (49000)
Net receipts 51000
Less: utilities (6000)
Depreciation expense (5000)
Section 179 expense (1000)
Contribution to keogh retirement plan (2000)
Gain on sale of Business truck (2000)
Real estate taxes (1000)
Net operating loss from year 5 (10,000)
Net self employement income 24000