Question

1. In 2018 Michael has $90,000 in salary from his full-time job and net self-employment income of $40,000 from his sole proprietorship. What is his self-employment tax? How much of it can he deduct in arriving at his AGI? Show and label calculations.

2. There are many differences between financial accounting income and tax income and deductions. Which of the following is an example of a timing (temporary) difference?

		Business meals are 50% deductible for tax purposes.
		Municipal bond interest income is not taxable, generally.
		Depreciation for tax purposes uses shorter asset lives than for financial accounting, generally.
		Federal income taxes are never deductible for tax purposes.

3.If a taxpayer commits tax fraud on his tax return, what is the statute of limitations for the IRS to audit his tax return and assess additional taxes?

		Three years
		Six years
		No limitation
		Ten years

Answer 1

Answer:

1. SELF EMPLOYMENT TAX:

Self employment earnings is 40000. According to IRS, most, but not all of your total earnings would be subject to the SE tax. To find out what is taxable multiply the earnings by .9235

40000 x .9235 = 36940.

92.35% of earning is taxable because 7.65% deduction takes into account of employer - half of the FICA tax.

Multiply SE taxable income by 15.3%

36940 x 15.3% = 5651.82

therefore 5651.82 is the taxable income.

DEDUCTION IN ARRIVING AT AGI:

Add the total taxable income of the year including self employed income

90000 + 40000 = 130000

Deducting the taxable self employment income we get,

130000 - 5651.82 = 124348.18 is the AGI

2. answer: Municipal bond interest income is not taxable, generally.

3. answer: Six years