 Income tax 2021-2022 tax software business use of your home. Get ready to get refunds to the max. Dive into income tax 2021-2022. Lassert 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 at irs.gov, irs.gov. Starting point single. Filer, Adam Smith living in Beverly Hills 90210. We've got the Schedule C rolling into line eight. Let's see that roll through process going to the Schedule C. The Schedule C being the profit or loss from business. Basically an income statement. We're starting off at the 120,000 on the income. 20,000 on the expenses. 100,000 then rolling in to page number one. Numero uno. Page number one being Schedule 1. I should say additional income and adjustments to income. And we're rolling in here. Line number three from the Schedule C that 100,000 then rolling into page one of the form 1040 back up to the 1040. And there's the 100,000. We also have to deal with the self-employment tax. Self-employment tax calculated on the Schedule SE. So Schedule SE self-employment tax is the name of it. And we see the calculation down here at the 14129, that 14129 then rolling into Schedule 2. So if I go into Schedule 2, the additional tax, there's the 14129 and then rolls in to the form 1040. Page numero dose number two, that is, there's the 14129. Half of that then is deductible above the line or a deduction for adjusted gross income, which we could see on the Schedule SE again. Taking half of that right there. And then it's going to Schedule 1. Let's go on up to Schedule 1 and check it out. Schedule 1, you'll recall, additions, income and adjustments. So now we're going to go to page 2, which is going to be the adjustments to income. 15, there's the 7065 that rolls into the 1040. The 1040 page 1, there's the 7065. The adjusted gross income, 92935. The standard deduction, 12550. Then we've got the qualified business income deduction. We're letting the software calculate at the 1677 to get to the net income of the 64308, mirroring that on our tax formula Excel sheet. There's the 100,000 coming from the Schedule SE income statement, rolling then in to the 100,000. We then have, I'm going to jump down here to the other taxes, self-employment taxes, which we calculated thusly in the additional taxes, which is beautiful calculation we made that's doing it for us now, the 14130. The 14130 pulling over to page to our income tax formula. Half of that being an above the line deduction, which is supported by our additional adjustments here, the 7065 taking half of that self-employment tax, rolling into the adjustments, getting us to the adjusted gross income of that 92935, which we saw on the tax return right there. We've got the standard deduction, 12550. And then I'm going to take this 1677, use the software to calculate that for now. There's the 1677 getting us to the taxable income of the 64308. There's the 64308 page number two, letting the software calculate the federal income tax, 9,900, and then the 14129 gets us to the 2429. So there's the 9900, 14130 getting us to the $2430 off. That's okay because that's rounding difference. That's our starting point. Okay, going back on over to the tax software, let's get rid of the check marks. And we're going to go to the Schedule C. And we want to say that we've got a home office that we're using. We've got a home office that qualifies. We want to be putting some of the deductions here. So that means that things related to the home office are things that we possibly can't deduct. So no, remember we could have things that are directly applied to our home office. So I'm imagining we have like a den that we're using or our home office. It's not a den. It's my home office. It's not a den. It's a professional place of business, home office. And so then I'm going to carve that out. If I did something specifically to the home office, then you would think I'd get the full deduction for it because it's not like it's allocated to the rest of the home. So if I fixed something in the home office, if I put paint in the home office itself, I'd get the full deduction, you would think, because it's ordinary and necessary to my business. But if it's something that's allocated between the entire home, like utilities, like the rent, for example, and then you've got things that could be allocated between other deductible items, like if I purchased the home, mortgage interest, possibly you may have depreciation on the home that you might be able to deduct. That would just be business side of things. And then you might have the property taxes, for example, then those things you would kind of have to use some allocation method. So first of all, you might have the simplified method, which is basically just taking the square footage and then basically multiplying times, I think, $5. That would be the easy way. But it might be less than what you could get if you used a more robust method, especially if you live outside or in a more expensive area and or you have a larger kind of office because there's a restriction to the amount that you can deduct that way. So let's go on down. Let's say we've got a deduction for the home office and we could dive into this in a little bit more detail in the publications to get a little bit more nuanced on it. So we might do that later, but just to get a general idea now. And that's publication 587 that you can kind of drill down on if you so choose. So let's just start out and say that we had 600 square feet. Now, obviously, if it was a separate room, it would be pretty easy. You could find the calculation possibly for that room or you might have to pull out the trustee ruler or something to calculate the square foot. If it's not a room and you need to carve out a piece of an open space that you're using exclusively for business or something like that, again, you might have to pull out the trustee ruler and do some calculations on that. And then I'm going to say the area of the home is the 1,500. And so then I'm going to elect first to use the simplified method. So if I use the simplified method and then go on over to the forms, notice there's a restriction here because it restricted it at the 300 and the square footage is the 1,500 for the calculation of the 1,500. So obviously if I go over that 300 in terms of my business office, it might be more beneficial for me to use another method possibly depending on what the ratio comes to. And if I live in a higher cost of living area, it might be more beneficial for me to use another method possibly then as well, but this is the simplified one. So now let's go back on over and let's not use the simplified method. Let's use the full method here and notice we have a breakout in our data input. You can just kind of get an idea or a feel of what's happening from the data input. You've got the indirect expenses and then you've got the direct expenses. Now if it's a direct expense to your office, you would expect it would be something that would be applying, you know, direct fully to the office. So for example, if you did something like repairs on the actual office itself and not on the home in general, which you would allocate, you know, indirectly to the office, like a 500 on the repairs and you were to go up to the forms up top. You could see the 500 flowing through here and now we've got the new schedule, that schedule being 889, that's the form 889, business expenses for business use of the home. And you could see it's going to be down here on the 500 and that full 500 in essence is pulling back into the schedule C. So that one's a pretty straightforward because it's basically, of course, an expense that's being used directly for the business because it's directly related to the office. You don't need an allocation. You're not doing some kind of allocation between a business and the personal. But if it's an indirect, that's where it gets a little bit more confusing because it wasn't something expended directly on the business, possibly. So now I'm going to have the same idea here, the 600 business square feet, but I'm also going to need the total area of the home so that it can use a ratio type of analysis. It's going to take the ratio 600 divided by the 1500. Anything that is indirect, then you would think it would use that ratio to allocate the portion of the cost that's business related. Now also note, you have a bookkeeping issue with relation to this as well because when you're doing your bookkeeping, it's best to keep your business expenses separate from your personal expenses. But if you're doing these kinds of expenses, then you're going to have both. Like if I'm going to be able to deduct the rent or the insurance on the home or the utilities, then I'm going to have to pay them out of either the business account or the personal account and no matter which one I do, I'm going to have to make an adjustment for the taxes at the end of the year. So from a bookkeeping standpoint, from a tax professional standpoint, in terms of how you're going to record this adjustment, it gets a little bit more confusing. You might actually need to do like an adjusting entry worksheet and then talk with your client on how best you would like them to basically record these type of expenses so that you can pick them up because you're going to need them, but you're also going to have to break them out so that you can allocate them and take this kind of ratio analysis. So let's say we have some of these things. Let's first think down here about like the rent. Let's think about a situation where you are not purchasing the home, but you're renting the home. So let's imagine what the rent for the year of the home would be. What would be the rent for the year on the home? It's two dang high. That's what it is. Okay, it's two dang high, but let's say it was 1,400 times 12 and let's say it was 1,600 that we are renting. And then if we had repairs and maintenance on the home in general, say we made repairs on the home in general, not the office or not specifically a non-office part. Let's just put that for, let's say, 2,000 there. The utilities, let's say the utilities are like $70 times 12. Let's say 840 on the utilities, 840 on the utilities. And then let's keep it at that. Let's keep it at that. And see what we have. So let's pull this on over to our forms. So now we're looking at the indirect items. Let's look at the form 8829. So we've got our calculation up top, the 600 divided by the 1,500. So I'm saying 600 square feet out of divided by the 1,000. The 1,500 means that 40% of my home is used for business. Exclusively, we're saying here we rent the place. Or we've got the items down here that we're looking at, which we're probably not going to be able to take some other place like we would with the mortgage interest, for example, because rent isn't usually deductible on the Schedule C. So we're going to say 168, the 2,000, the 8,840. That's the 19640. And then we're going to take a portion of that. And so multiply line 23 by line 7 above. So we're going to take that 40% in essence times the 19640 total cost to get the amount that we're going to allocate to the business, which is the 7,856. So that pulls down. We're taking the 7,856. It's not being reduced because we have profit here. So we're able to pull that in then to the Schedule C. So we'll pull that in here to the Schedule C. And so there it is, and it's reported down here, because you got that restriction that we talked about that it might not be able to push us down to a loss over here. So that's one reason it's kind of down below calculation. Now if we were going to do that in our tax formula, we might say maybe we could do it on the same Schedule C tab, or possibly you would do this on another worksheet to kind of calculate your Schedule C. But I can add, let's add another schedule here and do a similar calculation to it. And let's call it then the 8,829, form 8,829, business home. Let's say this is going to be F, 8,829, home. I'm just going to call it office, home office. I'm going to do this fairly quickly. I'm going to highlight the whole thing. I'm going to right-click. I'm going to format this thing. We're going to say let's make it currency bracketed around it. We're going to say no on the dollar sign. Get rid of the decimals for now. I'm going to scroll up so we got more info. And then I'm going to call it in line 1A, form 8,829, home office. I should probably be more formal and use the formal name, but I'll keep it at that for now. And then basically we've got the indirect expenses, brackets, or colon. And I'm going to put down here the indirect expenses, which are typically going to be what we had over here, which is like rent, utilities, repairs. Let's keep it at that for now. We might add a couple other spaces in case we have some other indirect expenses. I'm going to go and make that blue and put the brackets around them. Blue and brackets, bracket bracketed blue. And this is going to be the total indirect expenses. And I'll put that here summing this up. And so what did I say? I said the rent. What was the rent again? Two dang high. That's what it was. Okay. But it was 16, 8, 16, 8. So 16, 8, utilities is going to be 2,000. Is that what I said, utilities? That was repairs and maintenance or 2,000. And utilities, we said were 840, 840. And then I'm going to take the ratio, or let's say ratio calculation. Maybe I should pull this to the outside here. Let's pull this to the outside ratio. I'm going to say business use, square feet is going to be, I said, what did I say, 600. And then total square feet, total home square feet, which I said was, what did I say? It was 1,500, 1,500. Let's make these two blue and bracketed, blue and bracketed. And so that's going to be our ratio. And that's going to be equal to the six over the 1,005, making that a percent number group, percentifying it. Let's put the old underline on it. And that'll give us, that'll give us that. So I'm going to say, so indirect expenses allocated to business is going to be equal to the 19,340 times the 40. So there we have it. So that's going to be our little recalc of that. And then we might have the direct, direct expenses. And I might have some direct expenses down here. I'll just leave some blue items, blue items, and we'll bracketize it. And this will be the total direct, direct expenses, summing this up maybe on the outer column. So it's out here, lining up to this other column. And then I'm going to say this, at this point, this is going to be the total home office deduction, which is going to be the sum of the outer column. Now we're going to have a problem if this deduction takes us below zero, because I might not be able to take the full deduction in that case. But right now, I'm going to pull that over to the schedule C. So let's see if it matches up. If I go onto my here, we got the 7, 8, 5, 6. That goes to the schedule C, which is down here on the 7, 8, 5, 6. So I'm just going to pull that on over to the schedule C. So let's say net income, let's say net income. Let's do it this way. I'm going to put some room here. I'm going to make some room, some elbow room. And I'm going to say net income before office deduction, something like that. And then I'm going to bring in the office deduction, which is going to be equal to this number. And so now we've got this net income is this minus that minus the home office deduction. This is the net income before home office deduction. Hold on, hold on, 120 minus 20. Then I pull in the home office deduction. Let's give us one more row. And then I'm going to say home office deduction and pull that over from my home office page. And so now the net income equals to 100,000 minus that. Let's check the spelling. You did that way too fast. I know. I'm sorry. I'm sorry. I didn't know if I wanted to do the whole thing. I should. I'm going to check the spelling on this one. Business. Okay. So that's the general idea. That's what's happening. Then this 92 to 94 is pulling into the first line of the income statement here. So that's what we have on the tax return to we've got this schedule feeding into the schedule C. And then we've got the schedule C 92 144 feeding in to the to the schedule one and then the first page of the 1040 at the 92 144. And I've got something slightly different. So let's look at this one more time. I'm out. I'm at my home office. My home office was at 16 82008 40. So we've got 16 8200 and this should be 840. And so now we're at the 7 856 7 856 brings us to the 92 144 pulls us over to 92 144, which ties out to what's on the tax return. So that's the general idea. Okay. What if we had a loss, you might say, what if what if my net income was lower. So if I go on to my schedule C, for example, and I say that I only had income of 25,000. So if I do that, I go back to my forms and I go to my schedule C. Now I only have 5000 of income. So you can see I'm limited to 5000. It's not given me the rest of the deductible amount because it kept it at that 5000. So we might mirror that on our worksheet over here in Excel if we wanted to. And I'd say, okay, what if I change this income to 25,000. Then my deduction would be limited to the income here so I can use a logic function. If I wanted to mirror that it would look something like this equals if brackets. We're going to say logic test. If this number is greater than I'm going to go to the next schedule is greater than this number. I'm going to say comma, then what I want you to do is take this number. And so I'm looking up here. And then I'm going to say if not, if that's not the case, I'm going to go back to the schedule C and try to add another argument here. So I'm going to go back to where this last comma was before the schedule C right there. If not, then we want you to take this number where it's going to cap at closing up the brackets and enter. So now it capped it at the 5000. If this was at the 120,000, then it's going to take the full the full amount. So that's how you can kind of mirror that with using those logic functions. Let's bring it back up on the tax return to the 120s were taken the full amount again 120,000. And now let's imagine that we had a home 120,000. So we're not renting. But we have the home. So on the 8892 instead of this rent item, we might have to allocate between say the mortgage interest that would be deducted on schedule a if it's if we're higher than the standard. And the amount that would be here. So let's say let's say that the mortgage interest was like 12,000. And then the real estate taxes, let's say we're the 6000. So you also could have the depreciation that you could take into consideration. I won't get into detail with that because we're getting a little bit long. But the depreciation of the property is another area where you where you could possibly get the home office deduction. And the way to kind of think about that is going to the deductions here the depreciation, and then you'd put in the home, it would be allocated to the home category. And then you'd be looking at a building that that you would be considering and then possibly taking part of the deduction going to the home office. So maybe we'll dive into that in the future but just keep that in mind if you have the home versus renting the home. Now let's just take a look at the at the interest also just realize that if you depreciate the home it does have an impact on the basis as well. So you can actually it kind of complicates things when you sell the home because now you've got the you've deducted part of the home in terms of the cost or basis of it. When you had your office deduction but okay so now we've got you've got the mortgage interest you've got the real estate taxes you still got the repairs and maintenance the utilities. And so now we're getting that that allocation same kind of allocation method, which is now calculating the 8336. So that looks pretty much the same similar kind of situation the thing you just got to be careful of is that you might have the other side of the deduction which would be on schedule a if you were able to take the schedule a deduction. So let's imagine you were let's go back to the schedule a and I'm going to add to schedule a deduction which is the itemized the personal deductions and let's say that we had like contributions just to put us over the limit of 15,000 of contributions. So now let's go to the forms and if I look at the schedule a we've got an allocation of the 7200 of the interest here because now we're able to itemize and the taxes at at the amount that's being deducted for the real estate taxes. So, so let's let's look for example at the mortgage now. So I've got the 7200 plus if I then go to the 8829 we had the amount that's going to be deducted here, which is going to be the full amount of the mortgage times the ratio or 40% of it or let's think about it this way that 7200. If I took the 12,000 times point six, there's the 7200 if I took the 12,000 times point four, there's the amount that's being allocated here. So that's a little confusing when you do tax data input because you're going to get one form 1098 for the mortgage interest which you're then going to have to allocate possibly to the home office, and then also to the schedule a and so when you check it that gets a little confusing to see you know the allocation between the two also when you're talking to someone about the benefit of the home office. You got to realize that you can deduct these things here but you may also already have been getting some benefit from it by deducting on the schedule A as well so that's going to be the general idea this of course flows in then to the schedule C as well the schedule C then flowing in to the form 1040.