If you have been following our ChatGPT and AI series, welcome to week 5. If you missed weeks one through four, make sure to check out the links below, as well as surf through the Tax Practice News website.
So far we have covered everything from how to use ChatGPT to enhance you social media and marketing, improve efficiency in your bookkeeping processes and support your business writing. Here, we will dive into how ChatGPT can support training and research within your team.
You do need to take research with a grain of salt. Unlike Google, ChatGPT is only designed to return responses based on information after a certain date and within the last several years. But the opportunity exists to use this tool to assist your team with training questions which provides you and your managers with significantly more efficiency.
Here is an example of a question we asked:
I am preparing a form 1040 for a client and I need to prepare Schedule C for their business. They had an expense listed as property insurance. Where do I put this on the return?
Response: On a Schedule C form for a sole proprietorship or single-member LLC, you would typically report business expenses such as property insurance on Part II, Section 27 – “Other Expenses.” Here’s how you would do it:
- Fill out the top part of Schedule C — Make sure you have the basic information filled out at the top of the Schedule C, including the taxpayer’s name, Social Security Number or Employer Identification Number, and the principal business or profession.
- Part II – Expenses — In this section, you will categorize and report various business expenses. Find line 27, which is labeled “Other Expenses.”
- Describe the Expense — On Line 27a, you should enter a brief description of the expense. In your case, write “Property Insurance” or something similar.
- Enter the Amount — On Line 27b, you should enter the total amount of property insurance expenses incurred for the business during the tax year.
- Summarize — Add up all the expenses in Part II to get the total expenses for the business.
- Transfer to Form 1040 — After you have completed Schedule C and calculated the net profit or loss, you will transfer this amount to your client’s Form 1040. The net profit or loss from Schedule C flows to the “Income” section of the Form 1040.
Please note that this is general guidance, and it’s important to ensure that you are following the most up-to-date IRS guidelines and using the correct tax forms and schedules for your client’s specific situation. If you have any doubts or complex tax situations, it’s advisable to consult with a tax professional or CPA for accurate advice and assistance with tax preparation.
We followed this up with an additional question about how to handle the situation if the property taxes needed to be allocated between schedule C and schedule A and received the following:
If your client has property taxes that need to be allocated between their business and personal residence, you’ll need to calculate the portion of the property taxes that is deductible as a business expense on Schedule C. Here’s how you can do this:
1. Determine the Total Property Tax Amount
Start by determining the total amount of property taxes paid for the tax year. This information can typically be found on the property tax bill or statement.
2. Allocate Business vs. Personal Portion
You will need to calculate the portion of the property taxes that is attributable to the business use of the property. This allocation should be based on the percentage of the property that is used for business purposes. For example, if your client uses 20% of the property for their business, then 20% of the property taxes can be allocated as a business expense.
3. Report the Business Portion on Schedule C
On Schedule C, in Part II – Expenses, you can report the business portion of the property taxes as an expense. Use a description like “Property Tax – Business Portion” on Line 27a, and enter the calculated amount as the expense on Line 27b.
4. Keep Documentation
It is essential to keep clear documentation of the allocation process in case of an IRS audit. This may include records of the property’s square footage, business usage calculations, and any other supporting documents.
5. Report the Personal Portion on Schedule A (if applicable)
The portion of property taxes related to the personal residence should be itemized as a deduction on Schedule A if your client itemizes deductions. This deduction is subject to limitations under the Tax Cuts and Jobs Act (TCJA), so be sure to check the latest IRS guidelines for any changes in the rules.
6. Transfer to Form 1040
After allocating property taxes between business and personal use, ensure that the correct amounts are reported on both Schedule C and Schedule A (if applicable), and then transfer the appropriate figures to Form 1040.
It is crucial to maintain accurate records and be prepared to provide supporting documentation for any deductions taken on the tax return, especially when there’s an allocation involved. If you are unsure about the allocation or need specific guidance for your client’s situation, it’s a good idea to consult with a tax professional or CPA who can provide personalized advice and ensure compliance with tax laws.
These responses might not be absolutely perfect, BUT they are examples of questions your team, especially newer staff, can ask in order to keep moving forward longer in their work projects before having to interrupt a senior team member to ask for help.
The length of the answers and the steps by step instructions provide enough support for new team members to be able to step through projects and gain a better understanding of their work at the same time.
If you want to learn more about how to effectively use AI in your practice to improve efficiency and support your team, make sure to register for our live session of Future Forward next month!
You can register HERE.
You can find our other ChatGPT lessons below: