 Income tax 2021-2022. Schedule C, what's new for 2021? Get ready to get refunds to the max diving in to Income Tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business on the IRS website, irs.gov, irs.gov, looking at the first line of the tax equation, the income line. However, noting that we have the supplemental schedule, which is in essence an income statement having income and expenses, expenses basically being deductions. The net then flowing into line one, the income line and two from the Schedule C, the form 1040, ultimately, on line 10, which are, I'm sorry, on line eight, other income from Schedule 1, so that means the Schedule C, net income flows through the Schedule 1, Schedule 1 then flows through to the first page here of the form 1040. Here's the Schedule C, profit or loss from business, which flows into the Schedule 1. This is in essence an income statement. So what's new for 2021? We have the maximum net earnings, the maximum net self-employment earnings subject to Social Security part of self-employment tax is 142,800 for 2021. So what does this mean? We have the self-employment tax, which is basically like the payroll tax equivalent for the self-employed individual that's applied to basically the self-employment income in essence to bottom line of the Schedule C. There's two components to it. We have Social Security and Medicare. The Medicare is pretty well into the category of a safety net program that we're paying into to help people out that need help. The self-employment, I mean the Social Security, however, is something that we can't really decide if it's basically a retirement program kind of thing or if it's a safety net program. And so basically the money that we put into the program is going to have an impact on the calculation of how much money we get back in the form of benefits. And of course it phases out as income level goes up and it's kind of complicated, but basically you get more of a benefit the more that you put into the system. However, at the cap of 142,800, then you're not getting any more benefit in terms of how much money you're going to get possibly at the point of retirement or when you're receiving the benefits and therefore that's kind of the justification for the cap. There's all kinds of arguments in terms of, well, we shouldn't have a cap or the cap needs to be increased or decreased and so on, but in essence it increases each year and that's kind of the general rationale for it. So there is no maximum limit on earning subject to the Medicare part because the Medicare part is a safety net program and a much lower tax, so that makes sense there. Also note that this cap causes all kinds of problems when you have multiple things subject to social security, like if you have W2 income and you have self employment income and then now the cap gets kind of confused and when you're going to hit the cap and what are you going to do if you go over the cap, but we won't get into that now. The standard mileage rate, the standard mileage rate for 2021, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents per mile. So this would be using the mileage method when you're trying to calculate that. We'll talk about that in future presentations most likely, but it's another one that usually has to be increased with regards or in relation to inflation. And these two items will be items that the software will help you to do the calculation for the standard mileage and the maximum cap, especially if you only have one Schedule C business. But you need to keep these in mind because when you talk to other people about these kind of things and when there's problems with this cap, for example, if you have multiple things subject to self employment or social security, then you got to kind of problem solve at that point. So the COVID-19 related credit for qualified sick and family leave wages, the family's first Coronavirus Response Act, the FFCRA, was amended by recent legislation. The FFCRA requirement that employees provide paid sick and family leave for reasons related to COVID-19, the employer mandate expired on December 31, 2020. However, the COVID-related Tax Relief Act of 2020 extended the periods for which employers providing leave that otherwise meets the requirement of the FFCRA may continue to claim tax credits or required sick and family leave wages paid for leave taken before April 1, 2021. So this was an attempt to kind of provide benefit for the whole situation on an employer side of things. And if you're self employed, then you might have employees where this could take impact because you've got the employee taxes and the payroll taxes. But you also have the situation where you're thinking, well, wait a sec, you're treating me as an employee of my own business by charging me basically the employer and employee part of the payroll taxes in the form of self employment tax. So oftentimes when they pass a law like this, they often kind of forget about the idea of the flow through entities and the sole proprietorship. So then they have to put some kind of tack on caveat thing to kind of plug or, you know, take care of that kind of problem. So the American Rescue Plan Act of 2021, the ARP adds new section 3131, 3132 and 3133 to the internal revenue code to provide credits for qualified sick and family leave wages similar to the credits that were previously enacted under the FFCRA and amended and extended by the COVID-related Tax Relief Act of 2020. These credits under sections 3131 through 3133 are available for qualified leave wages paid for leave taken after March 31st, 2021. And before October 1st, 2021, report these amounts as quote, other income in quote, online six of your schedule. For more information about these credits, you can see a tax credits for paid leave under the family's first Coronavirus Response Act for leave prior to April 1st, 2021 and tax credits are paid leave under the American Rescue Plan Act of 2021 for leave after March 31st, 2021 for more information. Employee retention credit. The deduction claim for qualified wages, including qualified health plan expenses will be reduced by the amount of COVID-19 related employee retention credit under section 2301 of the CARES Act or section 3134 added by the ARP in the year the qualified wages expense was paid or incurred. You can see notice 2021-49 for additional information there, credits for self-employed persons. So refundable credits are available to certain self-employed persons impacted by the Coronavirus. See instructions for form 7202 credit for sick and family leave for certain self-employed individuals for more information. So you got the employee kind of situation where of course they're trying to deal with a payroll taxes and again, then you have this kind of situation where the actual self-employed individual, even if they don't have any employees is kind of being treated as an employee in and of themselves. So you would think they would need to have kind of a mirroring type of law which tries to do the similar kind of thing on on the self-employed kind of income situation. So the COVID-19 related credits continued excess business loss limitation, your loss from a trade or business may be limited. Use form 461 to determine the amount of your excess business loss. If any, your excess business loss will be included as income online 80 of schedule one form 1040 and treated as net operating loss that you must carry forward to deduct in a subsequent tax year. So remember that if you have a loss, then the IRS is going to be skeptical of losses because from an IRS perspective, they want you to make money. And then they want to take some of it as your silence partner. They don't want to be subject to the risk of losses and then have to have to, you know, share in your losses, right? So so they're skeptical of the losses. So the question is, can I take the loss? And it might be a little bit confusing when you see here your excess business loss will be included as income online eight. And so so that you say, wait, the loss is going to be income because it's kind of like a deduction if it's a loss because it's going to lower income. So you can imagine as it flows into the form 1040 here that a line eight, if it was income, you would think you basically have negative income. So it's going to be kind of like kind of like a deduction in essence because it's decreasing your income line, although it has an impact on the AGI and so on for phase outs and whatnot. So that's the general idea with losses. Business meal expense for a limited time business meals are 100% deductible under certain conditions, see meals and lodging later for more information. So the meals we it depends on the categorization of the meals. And we often had in our stuck in our mind that there's 50% deductible for for the meals and many of us, you know, you get this thing in your head that was meals and entertainment was kind of like a 50% deduction. For a long time and people have that kind of stuck in their head and they've they've adjusted what qualifies, you know, entertainment isn't isn't as deductible anymore. So now you got meals and what's going to be the business meal, what qualifies and what's the deduction related to it. And then we've got the paycheck protection program, the PPP. This was another thing that happened because of the problem with the coronavirus and whatnot. So then they basically tried to give out money, but they did it kind of in a funny situation where they're going to say, we're going to give out a loan, kind of like a loan. But under certain conditions, if you spend the money the way we want you to spend the money, then we're going to allow you to to not have to pay back the loan. And if you don't have to pay back a loan, then you basically got free money. And if you got free money, then the question is, do you have to include that money as income because you basically got money so you would think you would have to include it kind of as income. And if you have to include it in income, do I have to include it in income when I got the money? Or do I include it in income when the bank forgave the debt, meaning they I met the qualification so I don't have to pay back the money because I spent the money the way they wanted me to spend the money. So all these questions came up with these PPP loans. So now we've got revenue procedure 2021-20 has allowed for a safe harbor for certain taxpayers who did not deduct certain otherwise deductible expenses paid or incurred during the year ending after March 26 2020 and on or before December 31 2020 that resulted in or were expected to result in forgiveness of the loan. So notice also that if they if they basically gave you money and they said we want you to spend it in this way like on payroll or something like that because they were trying to they were trying to keep people not not to fire people even though their business didn't need as many people because they closed down the business basically because of the coronavirus and whatnot. So they were trying to keep people employed with this kind of regulation to incentivize people and so on. But then if if I got if I got if you gave me money so that I can pay my employees and then and and then you gave me the money do I also get the deduction you know for for paying the employees even though I paid the employees with the free money that I got right. So again it opens up a kind of can of worms on in terms of the report because it was kind of a new thing. So to find more information including requirements of this safe harbor you could see revenue procedure 2021-20. Obviously that would only be applicable if you if you had someone that that took out these PPP loans but a lot of people did if you had access to to that as well. And again you could dig into the revenue procedure to dive into more details with it. Reminders self-employed tax payments deferred in 2020 legislation allowed self-employed individuals to defer that payment of certain social security taxes for 2020 over the next two years. Meaning again as a try as an attempt to ease the burden on people or basically delay it push it out into the future. You've you've got this you didn't have to pay so you got the legislation allowed self-employed individuals to defer the tax payment of certain social security taxes for 2020. So if it's a deferral then it's going to have to be paid at some point in time right. So see how self-employed individuals and household employees repay deferred social security tax. So if you're in that situation if they took that deferral then the question is well when do I have to actually pay it and then you want to make sure that you're in compliance to avoid penalties and interest. Form 1099 NEC form 1099 NEC non-employee compensation is used to report non-employee compensation. This is a fairly new form I believe it was last year or the year before that that it was put into place before that it was reported on 1099 miscellaneous. So this is now one of the most common kind of forms that you will see that be reporting like compensation non-employee compensation like contractors. Reportable transactions you must file form 8886 reportable transaction disclosure statement to report certain transactions. You may have to pay a penalty if you are required to file form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transactions under under statements. Reportable transactions include so these are the reportable transactions you got a report on one transaction transactions the same as or substantially similar to tax avoidance transactions identified by the IRS. So certain transactions the IRS are going to say those look suspicious to us. We want you to give more information to clarify those types of transactions to transactions offered to you under conditions of confidentiality for which you paid an advisor. A minimum fee three transactions for which you have or a related party has contractual protection against disallowance of the tax benefits for transactions that we lost result in losses of at least $2 million in any single tax year. 50,000 if from certain foreign currency transactions or 4 million in any combination of tax years. So the IRS being skeptical of the losses because you might be able to take the losses and they don't want to share in the losses and they're going to be suspicious of losses that might be beneficial for taxes. Because remember taxes are backwards bad as good good as bad losses are good for taxes because they can lower the income and therefore the IRS is going to be skeptical that the losses are legitimate and so on. Five transactions transactions the same or substance substantially similar to one of the types of transactions the IRS has identified as transactions of interest. So the IRS is going to pick out certain transactions that they're skeptical about and they want more information about them. Reminders small business and self employed SPSE tax center. Do you need help with a tax issue or preparing your return or do you need a free publication or form these services taxpayers who file form 1040 form 1040 SR schedule C or F sees what we're kind of focused in on now ease the rental S is farm form 2106 as well as small business taxpayers with assets under 10 million dollars so then some resources could be available to you for additional information you can visit the small business and self employed tax center at and there's the website here IRS dot go forward slash business small. And then we have the gig economy tax center. So the gig economy is like the new new point where the government is skeptical they're focusing in on and note that the government is skeptical of those areas where they can't really get a full handle. They can't see exactly what is happening. So traditionally the government's been skeptical of like cash type of businesses restaurants or or you know bars and things like that. And things like salons and nail salons hair salons and so on where the end customer is actually just an individual citizen and not a company. And where you often have cash transactions that's why cash is something the government skeptical of because they can't force the payer the individual the consumer to to report a 1099 or a W2 on who they paid. You're not going to get 1099. If you if you do someone's hair or something like that from your customers. So the IRS is a little bit more skeptical about them. And for some I kind of feel like that's kind of why the government doesn't like those those kind of businesses and that because it causes them problems. I feel like that's kind of why they got cracked down on on the COVID thing. It's like it's not really the COVID. They just don't like the cash type of business. But in a case that's just skeptical in a case the new one is the gig economy. So the gig economy a lot of people are working on these platforms and they're in the platform themselves. Is it really the employer because the platform is just a connection between the one that wants the service and the person who's willing to provide the service. And so so that means that you have this situation where the IRS can't force anybody like they would like to to act as the employer or to act as the as the pay her like they would like to do. So that that makes it difficult for them again to track to kind of see exactly what's happening. So you can see what they're going to try to do. They're going to try to make the platform basically an employer and force them to make everybody that uses it as a service provider and employee. So they can force the platform to be responsible for the W2s, which probably will not be good for the economy itself. But you can see why they would want control over that. And then or and so that's or they at least force the platform or someone in the process to give a 1099. But until they do that, they're concerned that people aren't going to report their income for the gig economy. So the gig or on demand sharing or access economy refers to an area of activity where people earn income providing on demand work services or goods. You can visit IRS.gov forward slash gig to get more information about the tax consequences of participating in the gig economy.