1. "We just have additional income to claim that came in the form of a 1099 now. We didn't start our own new business."
In the eyes of the IRS, if you are not an employee, then you are self-employed and have your own business. You are in the business of providing whatever service that you do.
The reason for this is so that you can pay self-employment taxes (which are the same thing as Social Security and Medicare taxes for employees). This goes to qualifying you for Social Security benefits when you retire.
2. "Qualified business income -- which should be no"
TurboTax will tend to make the choice for you. See this TurboTax FAQ for more information.
3. "Accounting Method (Cash, Accrual, Other): Why do I have to enter an accounting method, and what should we choose?"
Nearly all small businesses use the cash method of accounting.. You report income when you see it; you report expenses when you pay it. That's cash.
4. "Material Participation - only worked for about 2 months on the project, so "no.""
Your wife was actually doing the work, yes? In this case, you answer "Yes".
5. "Required to File 1099"
This is asking you if your wife paid any contractors at least $600 for work that she sub'd out. This does not count bills she may have paid to regular businesses. The answer is probably "No".
6. "I feel like this is being overly complicated for something straightforward as trying to claim additional income. "
Please make your case to the US Congress who is responsible for the US Tax Code that makes these questions necessary.
As I noted above, having your spouse report this makes sure that (1) she reports and pays her self-employment taxes (which come back to you as SS payments) and (2) she deducts any reasonable business expenses to reduce her income and tax (note that most of these same expenses are no longer available to employees).
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