[Angela]

Hello friends,

I am so confused about a becker MCQ: CPA 04859, included in chapter one, 2014 version. The question is as follows:

Tom and Sharlene had the following items of income and expense during the taxable year.

Self-employment activity:

Gross income: 35000

Business license fees: 500

Marketing expenses: 2000

Salary paid to Sharlene: 10,000

Tom’s wages from his job: $67,000

Interest from money market: 1500

Gain from sale of securities owned for 3 month 15,000

What is Tom & Sharlene’s gross income before adjustments?

end of questions

---

The answer is $116,000

What confuses me is the answer says “Sharlene’s salary is not included as income because 100% of the net self employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.”

I understand that salaries paid to the sole proprietor is not tax deductible, however, why it is not included as gross income on tax return? Why it is considered a draw and what exactly is a draw (like a withdraw？）? And why Tom’s wage is included? I am totally lost on this.

guys please help me out!!! Thanks!!!!!!!!!!!!!

Audit 92 2013
Far 80 2014
Reg: May 2014

[CPA soon]

I think you are over complicating this problem. The questions is to determine the gross income for Tom and Sharlene.

The 35,000 includes the 10k salary so ignore the salary and look at the overall income which is 35k – $2500 in expenses. Then you add the income below 67k + 15k + 1500. Salaries paid were included on the tax return, not sure why you think they weren't?? Remember you are looking at the taxpayer's tax return not as a seperate entity tax return, this is all the 1040. Tom wage is included because the question is asking what his and Sharlene's income was, why would it not be included? This is not a draw, but you're looking at a situation were everything is passing through to Tom and Sharlene's tax return, not a corporate tax return. You are confusing this with corporations I think. A draw is when you take out money from the basis you have invested, not relating to any operations of the business. Again, remember this is not a corporations.

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Angela]

@ CPAsoon

Thank you very much! I think I was out of my mind and totally misunderstood the question… Now I get it. Thanks!

Audit 92 2013
Far 80 2014
Reg: May 2014

[Anonymous]

Becker answer says:

Note: Sharlene's salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.

What do they mean when “her salary is considered a draw?”

I got the answer correct but after reading the explanation, I'm beginning to think I don't quite understand it.

[TAXMAN710]

All of the net earnings of Sharlene's business are taxable to her. That figure would be the net of her gross income minus the deductible expenses. That net earnings figure will be included in the joint tax return as taxable income, regardless of if Sharlene actually takes any money to use personally or not. Even if she left all of the money sitting in the business checking account, she would still be taxed the same. Her taking money from the business is a non-taxable event.

REG-July 12
BEC-May 12
FAR-July 12
AUD-October 12

[highlightnumb]

Hi all im sure everyone is on the same page as far as self employment activities go but if there is anyone that is still confused about this particular question just basically look at it like this. If your own business generates 100,000 in sales/business income, you cant pay yourself 30,000 and deduct it from your 100k of taxable income if that were the case then everyone would screw the IRS. The only salaries you can deduct from business income are salaries paid to employees of your business. So as far as the 10k paid to Sharlene that cannot be a deduction because she is co owner of the business not an employee of the business. Same concept with partnerships. Partners cannot pay themselves a salary. Sharlene can withdraw as much money from her business account all she wants but she cannot take a tax deduction for it. Ok lets go have a drink.

Mario Marcel, CPA

FAR. Feb 2014 76
REG. Jan 2015 79 half way there!!
BEC. Feb 2015 79 thank you God!!
AUD. Apr 20, 2015 and will be done. Hold that thought 65, 7/14/15 85!
Ok where was I? Oh thats right now I'm Done!!!!!!!!!
Ethics 92!!

"You down wit SEC?, yeah you know me!!!"

Cali Candidate

All Becker Materials, Wiley Test Bank, Ninja audio, Ninja MCQ, Ninja Notes

[Author]

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