OldJack

The 1041 shows zero taxable income & deductions if it is passing taxable items to the 1041-k1. It does not pass assets/principal of the estate and a refund on page 1 is an asset that will refund to the estate for non-k1 distribution.

I never meant to indicate that it was not your call NECPA. Of course you are the preparer and must be the one to sign or reject the tax return. Just make sure that you are not being overly influenced by a possible penalty. You are not an IRS employee yet, although we probably will be soon. Good luck.

>>The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:<< It does not say if any of those things would make it a hobby nor does it say that the tax preparer should make that determination.

If I were an IRS auditor I would find that once a hobby always a hobby unless you can proof something unusual has changed (other than profit).

You are a fine example Tom! Where was your written plan??? Sounds like you are a "sadly dwindling social life". LOL

Oh please!! You have no evidence that this is a "dwindling social life". NECPA said >>I will ask her some more questions, but she just threw out a bunch of product that had expired after five years, so I think that she bought too much a long time ago.<< This may indicated the main loss this year was write-off of prior inventory. The fact that she has a full time job is not very relevant as most Mary Kay dealers fit that bill. I know of no requirement that there be a "written plan" for any business. In fact, most small businesses only write a plan if they need to borrow money. So maybe she just needs to write a plan for the tax preparer?? If that is the case just help her write a plan!! The 3 out of 5 rule is only a safe harbor and not a requirement later to declare the business as a hobby. I have know of business' that did not meet the 3 out of 5 and certainly continued as a business without classifying themselves as a hobby. So if she makes a hugh profit next year are you going to still claim its a hobby and not report on Sch-C???

Maybe the problem is are all of her expenses really business expenses?

A real test is if she had made a large profit, without a written plan, would you have reported it as a Sch-C business or a line 21 hobby? As a matter of fact Mary Kay has a plan which is sales by holding parties. Parties are like a crap shoot in that you spend money up front and if there are no sales you lose. It takes a lot of work to organize and conduct a Mary Kay party.

>>It is not my tax return, but I cannot sign something that I believe is incorrect.<< True... But only the IRS or the client can determine if it is not a business and you are not the IRS. Truth is you might believe but your client believes different and there has been no real determination. This case is what we use to call a grey area. It is your job to know the tax laws, but not necessarily your job to apply them.

>> It has to be a hobby in order for me to sign the return<< Well... If for no other reason I would disagree as if the client says its a "business" its her tax return! Who are we as tax preparers to say it is our tax return just because we sign?

Just a reminder, form 1041 is an income tax return. If the trust pays all tax due there is no tax attributes to pass to beneficiaries and no K1 needs to be given or attached to the 1041.

Did you say there were pictures??? Oh my God!!! I hope they don't get posted on the internet!

And this guy had an accounting firm? He probably represented himself? Like the old saying that a mechanic's car doesn't run well.

After it was over I ask the doctor what condition it was in, he said it was in good shape for a "well used" colon.

I have never found where it says that an accountable plan must be in writing.

For a partnership the tax effect is determined on the partner's 1040. It looks like the reporting of box 9c is the correct results as a portion of the gain my be recaptured as ordinary income if there have been previous 5 yr ordinary losses on individuals form 1040-4797 line 8. This is telling the individual to look at his previous 5 years form 4797 and prepare his current form 4797 accordingly. However, make sure you have filled out the depreciation correct on 4797 page 2 as recent 1250 property normally would not have to recapture depreciation.

No "Unrecaptured section 1250 gain" means when this is put on the 1040-4797 (line 8) if there are ordinary losses from prior 5 years, the sec 1231 gain will be recaptured as ordinary income rather than pass from the 4797 to Sch-D. It is not additional gain but a classification of the 1231 gain being subject to ordinary income.

>> Gross sales 528,000 COGS (by books) 228,000 including purchases but how can I calculate the year ending inventory when it is negative?<< Calculating inventory requires more than 2 numbers. Where is the beginning inventory number? How do you know ending is negative? How do you know there is no inventory if no one has counted?

WASHINGTON — The number of federal workers and retirees who owed delinquent income taxes jumped by nearly 12 percent in 2011, the Internal Revenue Service said Friday. Nearly 312,000 federal workers and retirees owed more than $3.5 billion in back taxes as of Sept. 30, 2011, the agency said. The year before, about 279,000 workers and retirees owed $3.4 billion.

You are not missing anything!

In that case I agree with $22,000 basis, however, the Original Post did say the "cost" was $25,000 rather than saying the sale price/sticker price was $25,000. $14,000 was not in the original post. Words matter!

>>minus the $3000 deferred gain.<< There is no deferred gain to record or consider in tax basis. See Publication 463: >>Trade-in. When you trade in an old car for a new one, the transaction is considered a like-kind exchange. Generally, no gain or loss is recognized. (For exceptions, see chapter 1 of Publication 544.) In a trade-in situation, your basis in the new property is generally your adjusted basis in the old property plus any additional amount you pay. (See Unadjusted basis, earlier.)<<

Of course a trade-in is always a like kind exchange or it would have to be treated as a sale. Most preparers report the old vehicle on form 4797 at zero gain/loss just to account for the asset disposition. Most do not report it on form 8824 as that form is difficult to understand for a non-tax transaction, but technically it should be on form 8824.

Basis of the new auto is $33,000. $25,000+8,000=$33,000. Trade-in value is irrelevant as it is a plug figure for the dealer to get to a price that the buyer will accept. $25,000 is assumed, in this example, to be the additional price to pay (cash or loan) after giving up his old vehicle. Book value to depreciate is the $33,000 after removing the old vehicle at book value adding to the new vehicle. In other words, new basis is: book value of trade-in plus actual cash/loan to pay for the new vehicle.

What is a "fair wage"?? What is Obama's fair tax?? What's wrong with $48,000?? Did he take additional "distributions"?? If no distributions other than salary the IRS has no authority to do any reclassification of his wage. His S-corp could have a million dollar profit and his wage of $48,000 could be fair depending upon his time, effort, and participation in making the million. There is no justification for issuing a 1099 as there were no 1099 payments.