 Income Tax 2021-2022 Software Example Disposition of Business Property. Get ready to get refunds to the max, diving into Income Tax 2021-2022. Lesser Tax Software, you don't need Tax Software to follow along, but you might want the Form 1040, which you can find on the IRS website, irs.gov, irs.gov, starting point. We've got the single file or Adam Smith living in Beverly Hills 90210. We're starting out with the business income flowing through here to the $100,000. Let's see what that flow through looks like. We're starting out with the Schedule C. This is going to be the Schedule C profit or loss. We've got the $120,000 starting at the gross income minus the expenses of the $20,000. Getting us to that $100,000. That pulling to Schedule 1. Schedule 1 with the income, line number 3, which pulls into the first page of the Form 1040. Line number 8 with the $100,000. We then have the self-employment tax being calculated on that. Self-employment tax on the $100,000. That's getting us to that $14129, which is on page 2 of the Form 1040. Page number 2. Other tax right here, the $14129. And then we got half of that that gets to be deducted on the Schedule E. As we can see here, that's $7,065 on the above the line deduction or deduction for AGI, adjusted gross income. That's page 2 of the Schedule 1. So, there is that that pulls into the page 1 of the Form 1040. Page 1 of the 1040, there's the $7,096 to get us to the $92935. We got the standard deduction of the $12,550. Then the qualified business income deduction, which we're going to let the computer calculate at the $16,777 at this point, taxable income then $64,308. Let's mirror that in our Excel worksheet. $100,000 being drawn in from the Schedule C, which I just recalculated our little income schedule here. We've got the tax being calculated, other taxes, self-employment tax, which we populated over here and did a calculation for it in the prior presentation. That was good times. Additional taxes, so there's the $14,130 that's pulling in here. Half of that being deducted with the above the line deduction, which is the adjustments to income taken half of that self-employment tax. There's the $92935, which we're seeing over here, $92935. We've got then the $12,550 standard deduction. We've got the qualified business income. We're relying on the software to calculate at this point. We've got the $64,308 at the taxable income. Same point here, $64,308 page number two, calculating the federal income tax at the $9,900. The FIT, there's the $9,900 plus the $14,130 self-employment tax gets us to the $24,30 on the tax at this point. So now we want to think about a property that we might have on the book. So just a quick recap on the property in general. If you bought something like equipment, then even if paying cash for it, we can't generally just put it on the expenses here because you can imagine if I were to do so, it could be kind of a big distortion. So let's say I bought something like equipment that I would have used for the next 10 years. If I just put it on the books as equipment expense, that would bring my income down to zero. But if I'm going to use it for the next 10 years from an accounting standpoint, you should put it on the books as an asset. From a tax standpoint, they're also going to require you to do that. It gets a little messy, however, to do that because the tax depreciation schedules are not designed to be the most appropriate book depreciation schedules oftentimes. So from a small business perspective, you might then choose to run your books on basically a tax basis for depreciation purposes or you might have separate depreciation basically for the books and the taxes so that you'll have to make that adjustment at the end of the period. So if you're a tax preparer, you got to kind of keep that in alignment or in your mind. So for example, if we put this on the books, I'm going to say that we have a depreciable kind of thing. It's going to be a depreciable piece of equipment, let's say. So let's say that it's going to be depreciation. And I'm just going to call it generic equipment equipment. I'm not going to call it generic equipment, just equipment, but you're like a generic, you have that in your mind, that parts in your mind. And then it's going to go to schedule C and then the activity. It's going to be that restaurant schedule C the category. Let's just say it's going to be a let's make it a machinery and equipment and the date placed in service. Let's just make it at the beginning of 01 01 21. And then we're going to say the cost is let's make it at the 75,000. Let's go for and then the depreciation method will pick up. We put it on the books for machinery. Let's say it's seven years, seven years, makers, seven years, makers, office equipment, furniture. So let's put it there. Actually, let's put it on the five year. We'll put on the five year office equipment rental five year makers. So then so there we have it. So so there it is and we'll keep it at that. So just to get an idea of that, then if I if I pulled this over to the forms and look at my schedule C and say, okay, what happened to the schedule C? Well, now I've got this depreciation that that has been taken. So you note that it's not being recorded in the format of like, like just an expense in terms of equipment expense, but it's in depreciation. The reason it's the full amount here. If we look at the schedule, then we've got the let's look at the regular schedule. Now we got this added depreciation schedule to help us out with the calculation. So we got the 75,000 and then we took the special depreciation. So that's going to be an accelerated depreciation method, which they're trying to do to kind of like stimulate the economy. So that's why you get all of it in year one, which is kind of like just expensing it, which I just said you don't just expense it because you got to do it this way, but you have to do it this way so that you then go through the code to get the special depreciation. And then once they change this and you know, they might then remove the special depreciation or you might have more property than it's going to qualify for the special depreciation. And in that case, you'd only get part of it in the current year. So that's why the tax code is different than bookkeeping because on a bookkeeping standpoint, you would think that that you would just allocate it over the useful life from an accounting standpoint, but the tax code again could change so they could have the special depreciation 179 depreciation and then that could go away, you know, over time. So that and that's going to be the differences between the tax code and the book. So let's just pretend that it didn't apply just so we can see the depreciation being something different than the 75,000. So just for argument's sake, if we removed it, then you'd have the 75,000 and then basically this is a double declining kind of calculation for if you know depreciation calculations and a half year convention. So double declining half year. And so then we've got the 15,000. So then you would only get the 15,000 in the current year on the schedule. We'll see. So note that you'd have to record it as on the books as an asset and then depreciate it in the tax code. You might have those accelerated depreciation methods which could give you a significant amount of depreciation in the year of purchase. So that's that's the general idea. So now let's let's say we had something on the books in the past. So let's bring this on and say let's say this was on the books as of let's say let's say 2000 as of like a couple years ago. So let's say this happened on 18 2018. And so it was on the books there and then we had prior year depreciation. Let's just say the prior year depreciation was 20 prior year depreciation allowance 20,000 prior year depreciation or prior year depreciation. Or let's make it 20,000 here. So there we have it 20,000 there. Okay, so now if I go back on over to the forms now with the current year depreciation is being recorded even though I made the purchase in the prior year because we're allocating the depreciation over the life. If I go back to my depreciation schedules here look at the regular schedule. Let's zoom it in a bit zoom it in. We got the 75,000 and then we've got we've got then prior year depreciation was at the 20,000 and then the current year is at the 8,640. So now let's say we sold the thing. Let's say we sold it like in the middle of the year. If I sold it in the middle of the year. Now I'm going to have a 20,000 amount of depreciation that I already took and the current depreciation I'm going to have to basically calculate a bit as well. Also, I just want to just point out that if I look at the schedule see here. This is just showing us the allocation of the cost and we're only looking at an income statement. So you see no balance sheet. This would make more sense if we had a balance sheet but we have a balance sheet because it's supposed to be easier or more simplified without a balance sheet. That's why you just have the schedule see but we have a balance sheet account, a balance sheet component of the depreciation schedules which is basically the fixed asset or property planted equipment part of the balance sheet. So that is kind of what we're looking at over here is kind of a balance sheet account calculation. Okay, so now let's say we sold it in the middle of the year. The other thing to note is that if you're dealing with a business that is not on a tax basis but they're recording their books on a book basis, then they might have different calculations. Their book calculation might look like this. Well, and here it's the same. Let's bring it over and make it different. Let's make it different for the books. Make it different for the books. Okay, I just made up a difference here. So if it was different for the books, that means that if your client recorded it on their side, they would probably record it on a book basis and even then they might mess up the book basis calculation for it. So that means that it gets kind of confusing. Sometimes from an accounting standpoint, you'd have to reverse what the client did and then enter it again and that gets into bookkeeping because you got to record it in accordance with the tax law. And that's another reason why the schedule C can get more confusing when you got these sales of basically property that are taking place. So I'm going to go back to the tax depreciation here. And let's say there was a sale. Now let's say that we sold it. Let's say we sold it in the middle of the current year, 06-15 and then 2-1. And then it's not a bulk sale. So we're only selling one item. If you sell multiple items, then you can kind of combine them together. Basis adjustment, no, I'm not going to put in the expenses and I'm going to say we sold it for $70,000. Let's go back on over to our form. So now we got the depreciation. So we still got some depreciation because we still had it for part of the year that is taking place here. If I go then to my depreciation schedules, basically like the balance sheet type of form. So now we've got the $75,000. We've got the $20,000 from prior years. And now we've got the current year depreciation that took place that is now being flowing through to the Schedule C. And then we've got the gain or loss calculation that is going to be applicable as well that wasn't on the Schedule C. But rather we see the form here. We see the form sale of business property. And then if we go to page two, it gives us some detail about it. So we have the calculation. So you'll recall that if I pull up, well, if I just do this in Excel, you'll recall basically we had the cost, which was $75,000 minus the depreciation, which we could pick up from the schedule over here, was the $75,000 and the current year for the 4320. So that's going to give us then that gives us the $24,320. So the basis basically would be the 50,000, the difference between those two, the 5680, and then the sales price was $70,000. So that would give us generally a gain of that $19,320. So that would be just the general idea. We'll basically let the software do the calculation here. So that's the property component in the categorization of 1245 property. And then we see the 4797. So we've got the 19320 that's pulling over here and that that's going to be going to part one, line four. So redemption gain on line 17, enter on schedule one. So that then flows up to schedule one. And now we have our item up here with the schedule C income, which is now at the 95,680. And then this gain or other gains or losses from the 4797, the 19320 that then flowing to the 1040. So within the 1040, we see that flowing in from the other income on line number eight. So now let's just make an adjustment. Let's say, well, what if we had a situation where like we had a loss on it? So let's say we sold it. If I pull out my little calculation, let's say we sold it for 25,000. Now we'd have a loss situation. You would think let's plug that into the system and say, okay, well, what about a loss situation? So I'm going to say we sold it now for 25,000 going back on over to the forms. So now we're going to we're going to take a look at the loss here. So now we've got the form 4797 sale of business property equipment. We had the gross, the gross sales price, the depreciation. And this is the cost or basis. So we get the 25,680, which we saw in our Excel calculation here. So that then pulling over. Whenever you have a loss, the question is, well, do I get to take the loss? So that's flowing in to the schedule one and it's netting out over here on kind of like the income line. So here's our income from the bottom line of the schedule. See the loss of the 25,680 summing up to the 70,000 in total. Pulling that over once again to the form 1040 line number eight. So just a quick view at some of the complexities with the sales. They can get somewhat complicated and just note that if you're doing the tax preparing type of business or if you're on the bookkeeping side of things in your business, then you got to be careful with the business property because of those differences with the depreciation schedule, whether you as a small business or as a tax professional are keeping the books or helping your client keep the books on a tax basis or having different book basis records. And then there could be some accounting involved. You might need help in order to basically record the transaction properly with regards to disposition so that they're in alignment with the tax code and the rules related to the tax code, which usually takes into account kind of bookkeeping knowledge to pick that up. And usually CPAs are usually, that's what they're more trained in a lot of times. So when you're picking up those business returns, then you just want to figure out how much bookkeeping work are you looking to put in with and do you have a network to kind of help out with those situations.