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Home └NLT Pro Network Community Preparer Training └Chapter 8, 9, & 10: Reporting Net Profit or Loss from Business, Recordkeeping and Documentation, & Tax Planning for the Self-Employed

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Chapter 8, 9, & 10: Reporting Net Profit or Loss from Business, Recordkeeping and Documentation, & Tax Planning for the Self-Employed

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This lesson covers how to report net profit or loss, maintain proper records, and implement tax planning strategies for self-employed clients. Ensure accuracy and optimize future tax outcomes.

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1. John’s business has $50,000 in income and $60,000 in expenses. He reports a net loss for the year. How will this affect his personal tax return?
He can carry the net loss forward to offset future income The net loss will not affect his taxes He can only deduct the loss against business income He must pay taxes on the full $50,000 in income
2. Sarah’s business reported a net loss of $10,000. Can Sarah use this loss to offset other income, such as wages or investments, on her personal tax return?
She can only deduct the loss if she has capital gains Yes, she can deduct the full $10,000 loss from other income No, she can only use the loss to offset future business income She must file a separate form to use the loss against other income
3. Mike has a net operating loss (NOL) for the current year. What can he do with the NOL under current tax rules?
He must use the NOL to offset current year income He can carry forward the NOL to future years to reduce taxable income He can carry back the NOL to previous tax years The NOL is not deductible and must be ignored
4. Jennifer’s business made a profit of $40,000, but she had losses in prior years. Can she use the previous losses to reduce her current taxable income?
No, she can’t use prior losses She can only offset $10,000 of current profits with past losses She can’t use losses unless they are from the same type of business Yes, she can apply the previous losses to offset the current profit
5. Tina’s business expenses exceeded her income this year, and she has a net operating loss. What happens if she decides not to carry the loss forward?
The loss can be deducted against future wage income She can apply the loss to investment income only She must forfeit the ability to use the loss in future years The IRS will automatically carry the loss forward for her
6. Steve runs a small business and deducts various expenses on his Schedule C. How long should he keep records to substantiate his business expenses?
At least 2 years At least 3 years At least 5 years Forever
7. Kelly runs an online retail business and keeps digital receipts for her expenses. In case of an audit, how should she organize her receipts?
Keep them in a single file, even if they’re mixed with personal expenses Keep them organized by category and year for easy reference She doesn’t need to keep receipts if they’re under $100 The IRS doesn’t require receipts if expenses are logged in software
8. Michael owns a construction business and pays for materials in cash. How should he document these transactions?
He doesn’t need to document cash transactions He can ignore cash purchases for tax purposes He should keep written logs and receipts for all cash purchases The IRS does not allow deductions for cash purchases
9. Samantha uses her vehicle for both personal and business purposes. What records must she keep to claim the business portion of her vehicle expenses?
A mileage log documenting business miles driven Receipts for gas and repairs, even if for personal use Her driver’s log from the DMV She doesn’t need any specific records to claim vehicle deductions
10. Jake’s business was audited by the IRS, and they requested documentation of his deductions. What happens if Jake fails to provide the necessary receipts?
The IRS will allow the deductions based on estimates The IRS will disallow any deductions without proper documentation Jake will have to pay a small penalty but keep his deductions The audit will automatically be dismissed
11. Mary is a self-employed consultant and wants to reduce her tax liability by maximizing deductions. Which of the following is a legitimate strategy to reduce her taxable income?
Prepaying for business expenses before the end of the current year Delaying client payments to the next tax year Claiming personal expenses as business expenses Filing for an extension to reduce taxes
12. Sarah earns a substantial income from her consulting business and is looking to reduce her taxes by contributing to a retirement plan. Which retirement plan is most beneficial for her as a self-employed individual? a) b) c) 401(k) d)
401(k) provided by her previous employer Traditional IRA SEP IRA or Solo Roth IRA
13. John’s income fluctuates throughout the year, and he wants to ensure that he is setting aside enough for taxes. What is the best strategy to avoid a surprise tax bill?
Set aside a percentage of his income for estimated tax payments Pay taxes at the end of the year when his income is clearer Borrow funds to cover any taxes due at year-end Wait for his accountant to calculate his total taxes after year-end
14. Dana wants to optimize her deductions for the current year. She knows she will have large expenses next year. What strategy should she use?
Defer expenses until next year Accelerate business expenses into the current year Spread out her expenses over multiple years Don’t report any expenses until the next tax year
15. Ben wants to be better prepared for tax season. Which of the following practices will help him avoid last-minute stress?
Waiting until tax season to gather all of his receipts Filing for an extension every year Estimating his deductions without keeping receipts Organizing records throughout the year and working with a tax professional