 Income tax 2021-2022, software example, business expenses, tax. Get ready to get refunds to the max. Dive it into income tax 2021-2022. Listener tax software, you don't need tax software to follow along, but you might want to have 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 100,000 flowing into page one of the form 1040 from the Schedule C. Let's look at that flow through process. Going to the Schedule C, we have the profit or loss from business. We've got the 120,000 gross, the 20,000 on the expenses to start off with, the net, the 100,000 then flowing in to Schedule 1. Schedule 1, additional income and adjustments to income. 100,000, the total of Part 1 of Schedule 1 flowing into the form 1040 on line number 8. We're also going to have the self-employment taxes we've got to deal with. We've got to deal with those on Schedule SE, which is called the self-employment tax. And so down below, we got the calculation of the 14129, not 14129, then flowing into page number 2 or Schedule 2. And here it is there. That also then flows into the 1040 page 2. There's the 14129. We get half of that deducted. We could see that on the Schedule SE where we take half of it right here. That flows then in to the Schedule 1 into the Schedule 1 page number 2. There's the 7065. That flows into page 1 of the form 1040, form 1040. There it is, the above the line deduction or adjustment to income 100,000 minus the 7065 gives us to the 92935. We've got the 12,550 for the standard deduction. We've got the 1677. We're allowing the software to calculate. That's to qualify business income deduction form 8995, getting us to the taxable income of the 64308, mirroring that on our formula here. 100,000 pulling in from the Schedule SE at the top line. Here's our Schedule SE income statement, net flowing in to that line number 1. We're going to jump down to the tax line, the other tax for that self-employment tax going on to the tax calculation. That's going into the additional taxes where we're doing that calculation for us here. We put together that fancy worksheet in a prior presentation if you want to check it out. It's a good one. It's a good one, but that flows in here. We get half of that as the above the line deduction you could see here. That then we calculated on this schedule, adjustments to income, just taking half of the self-employment that flows into that first page to get us to the AGI adjusted gross income 92935. We've got the 12,550 of the standard deduction, the 1677, that we're pulling from the tax return relying on the return for that number. And that gets us then to the same 64308 taxable income. We see that amount here on page 2. We've got the federal income tax relying on the software to do that calculation at the 9900. And then we calculated the other taxes. So the total tax currently at the 2430, 2430, matching almost here 2429 off by a dollar. That's the starting point. We're okay with the dollar difference. Going back to the number page 1. So now we want to think about taxes that could be deductible on the Schedule C. So Schedule C, if it's ordinary and necessary, we can deduct it. Taxes always complicate things because taxes are a complication just in general and we have a whole lot of different types of taxes. So first we have the federal income tax. Is the federal income tax deductible? Typically not. Why? Because you would think it's an ordinary necessary expense. So you'd think, well, it should be. If I got this 100,000 that is ultimately rolling through to the form 1040, which is being used to calculate the federal income tax, which is going to be this actual 9900, can't I take part of that tax and allocate it to the Schedule C? Well, you can't really do that because we're using the Schedule C to calculate the 9900 tax. And if we got to deduct it, it would make a circle reference. So we can't use the tax deduction to calculate the tax typically and that would be confusing. On the state tax side of things, if it's a state tax which is on the net income, then generally you might not be able to deduct the state tax as well. If you have a deduction for the state tax of the gross as distinguished from the net income directly attributable to the business, then possibly in that instance you could deduct it and that would be dependent on the state and local taxes and you would probably be well aware if you're in a state that's taxing you on the gross receipts as well. So those are going to be the income taxes and then we have the payroll taxes. So if I go on to the Schedule C, note that we have to distinguish the payroll taxes from the taxes on our self-employment. So this 100,000 at this point in time, the 100,000, we are then treated as kind of our employee and employer of our own business based on that net income being subject to the similar thing as payroll taxes which is Social Security and Medicare which is being calculated on the Schedule SE. So notice these rates are basically the employee and employer portion in essence that were calculated at 14129 that is not the income tax but is the self-employment tax and then half of it is being deducted. This is different than payroll taxes even though it's kind of like we are being treated as the employee of our own business and being subject to the self-employment tax or at least with regards to self-employment tax. If we hired somebody else then we would have wages. So if we had wages here we would have to be dealing with Social Security and Medicare as well with regards to what we pay the employees. Now in that case we would have something that would be reported here most likely and possibly also reported in the taxes area. So for example if I jump into the data input here for the wages on a Schedule SE we might have wages let's say of the 10,000 and then we might pay let's say 10,000 and then we might pay taxes which are payroll taxes which we might break out. Let's just take a look at the calculation which it might look like. If I was to say pull out the trustee calculator and say that we had let's call this Social Security 10,000 times .062 that would just be our portion of it 620 and then this would be Medicare let's call it MED which would be the 10,000 10,000 times .0145 which would be the 145. Now this is what it would often look like basically on the tax forms for other people's wages right you got the payroll taxes here so if I put that into my form I've got my taxes here and my wages that we paid here. So note that I'm still calculating Social Security and Medicare but I'm not calculating it on my own wages because I don't pay myself in a Schedule SE I'm not going to be an employee of my own business that's different I was another type of entity possibly like an S Corporation a flow-through entity where I would possibly have myself on as paying myself in essence and be subject to self-employment tax 35 and I'm paying payroll taxes not on that net the payroll taxes are being paid on the employee wages of the 10,000 and notice up here I'm only breaking out the portion of the payroll taxes that are my portion that I have to pay in other words the withholding for the payroll taxes would also include Social Security and Medicare I'm not breaking them out but including those in the $10,000 that I paid to the employees because in theory they got the $10,000 and then they paid their own payroll taxes but in practice what actually happened is they didn't get the $10,000 I took from them their portion of payroll taxes paid it to the government I get the deduction for their portion of payroll taxes but it's not my tax it's their tax therefore we recorded as wages here and then we record the taxes our portion of the taxes kind of up top so those are a little bit confusing to keep separate you also might check this these numbers and compare them to your payroll reports which would be the quarterly 941 reports possibly the 940 at the end of the year for the federal unemployment tax and the W2 and W3 form as you do that you want to keep this distinct in your mind that you have this number if it's broken out is just going to be the employer portion of the payroll taxes and this number is going to be including the wages and the withholdings including the withholdings that they paid so we've got those payroll taxes and then we could also the self-employment tax now the self-employment tax we talked about the calculation of the self-employment tax here the 12,000 in this case now it's now at 12,609 that of course is being charged to us if I go to the 1040 page number two we've got then the self-employment tax now at the 12,609 but we get to deduct half of it and this gets a little confusing to why do you get to deduct half of it they're trying to mirror what would happen in a normal corporation so that the so that the sole proprietorship is not disadvantaged from being a sole proprietor as opposed to basically a corporation right and so so what the corporation gets to deduct as you can see here is if they were an employee situation and notice in a corporation even the high paid executives are going to be you know the employees of the corporation getting payroll in essence so in that case you would the corporation as a separate legal entity paying its own taxes would then be deducting the wages here that they would be paying and then they would be deducting the taxes if you're charging me as a sole proprietor taxes on my net income here the 89 to 235 in this case then they want to charge me both the employer and employee portion so that means when I when we calculate the tax you can see it's it's double here what it was for the Social Security and Medicare if you were talking about just the employee or just the employer portion because we are in essence paying both portions of it so I should be able to deduct you know half of that as I would like the employer portion of the employer portion of the tax which you would which you could see kind of mirrored here for our employees but I can't deduct my portion of the of the self-employment tax on the schedule C because I used the net income in order to calculate the self-employment tax and I'd get a circle reference if I did that so I have to record it they put it up here on the schedule one page two so the self-employment tax is something that is is half of it we get to deduct it but it's a little confusing because we can't deduct it on the schedule C that's why taxes confuse things we got to deduct it over here on the schedule one which pulls over to the page one of the form 1040 so it's business related but it's somewhere other than the schedule C now then you have the real estate taxes real estate taxes if it's going to be real estate tax on a building that is just for business and you own it and you're paying taxes on it for example or equipment that is just for the business well that's pretty straightforward you you would be able to deduct the real estate taxes because it's business related generally and I mean you also so but then if you were to have like your home like possibly you have a home and you have real estate taxes on the home the property taxes then you would you would mean maybe be filling out a business use of the home which would look something like this you would have to allocate we might talk more about this later but the general idea is now you've got taxes that are split up between the business and the and the personal so you might allocate to the business the business portion which would look something like this and again we won't go into detail here but just the general idea you'd have to use some kind of ratio so possibly you would be saying that my office is 500 area versus the home has 1200 square feet and that's what we can use to do our ratio calculation so that means the amount of the property taxes that we're going to be applying you would think would be 500 divided by 1200 or 41.66% if the real estate taxes were 10,000 then we can allocate possibly a portion to the business and in this format so now we're going to say down here down here we've got the we've got the expenses for business use of your home did not report these expenses elsewhere attached the 8.829 unless using the simplified method and we've got the calculation of the 4167 here's the form 8.829 which has our ratio there's the 41.66 we just took a look at here's the 10,000 and we're taking the the amount of the 4167 so again you oftentimes if you have that kind of breakout between a business and personal you've got to figure out how much is business related now if you were able to deduct on the Schedule A then possibly the rest could be deducted on the Schedule A here but we don't have a Schedule A at this point because we're below the threshold if we were above the threshold of the standard deduction we might be able to allocate some of it to the Schedule A let's just take a look at what that looks like if I was to say that I want the deductions opening the Schedule A the thing that usually puts us over is the interest that we would pay in the property taxes and the state taxes combined usually let's say this was let's say this was 15,000 of interest just to put us over so now we've got the Schedule A the Schedule A at the 15,000 and we've got the property taxes state and real estate taxes of the 5833 so now of the 10,000 taxes we paid we've were deducting 5833 here and the other side on the Schedule C plus the 4167 there's the 10,000 so that gets a little bit confusing to kind of make to kind of make those breakouts but the general idea is of course that if it's if it's business related you would typically get the deduction here on the Schedule C and if there's some crossover between business and personal you might be able to get the business related item do some kind of allocation here and then if it's the home use then you might have to use that home office item which we might dive into in more detail in a future presentation then we've got the sales tax information now when we're buying stuff with sales tax usually it's going to be a fairly straightforward type of thing on the purchasing side of things if I purchase something and I'm charged sales tax which in the United States is typically charged on the state local level if I purchased something like supplies for example and I paid $100 for supplies and $5 for sales tax or whatever then I would I wouldn't put $100 in supplies and $5 in taxes I would just report the supplies at $105 I would be able to deduct the taxes related to the items I had here on the Schedule C now you got to be a little bit careful because on the Schedule A you'll recall you can deduct the taxes for your state your state taxes and then if you have the sales tax you might have the sales tax calculation here which you could use a method to have the sales tax so it depends what states you're in so but you can't really double up the tax the sales tax in that way in other words if you if you had something that you deducted for sales taxes over here that it would be a business related item right and so we have the sales tax here if you purchased something like a piece of equipment then the piece of equipment that you purchased that you paid sales tax on would go on the books as an asset and you would include the sales tax as the asset you would get the benefit from it eventually because it's a business asset in the form of depreciation so then you would expense it in the form of depreciation the basis or cost of the item being depreciated over time and you would get the expense flowing through here as that happens if you purchase inventory then you would you would include the sales tax that you paid for the thing that you're going to sell the inventory item on the books as an asset which you can't see here because this is just the income statement but then when you sell the asset you would record it it would be part or included in the expense up here of the cost of goods sold and then there's the sales tax that you pay to the government so if you pay sales tax to the government then you don't get to deduct the sales tax as an expense because you never included the the item that you received in revenue so for example this 120,000 if I was subject to sales tax on it of 5% I might have actually collected 120,000 times 0.05% another 6,000 for a total of 126,000 that's what I might have collected but I'm not recording an income 126,000 because that 6,000 in theory isn't something that I actually charged the government used me as the tax collector they forced me to be the tax collector so what the government wants us to do then is to say I'm not going to record the 126,000 even though that's what I received I'm only going to record the 120,000 the 6,000 when I receive it is going to go on the books as a liability and then when I pay the government that 6,000 that I collected on their behalf I just reduce the liability therefore neither the income nor the expense is going to be on the books you can imagine a situation where I record the 126,000 as revenue and then 6,000 as an expense to get to the same net down below with the net amount right would be the same but that's not what the government wants us to do they want us to record the 120,000 not including the amount that they made us collect for them on the sales tax and then when I pay the government I don't get to deduct the expense because I didn't include the receipt of the funds in the revenue neither the income nor the expense is included in the income statement which is basically what the schedule C is so taxes get a little bit confusing of course because taxes really complicate things way more than they would be otherwise but they're the necessary thing that we got to deal with the complications here so it's good times