 Income tax 2021-2022, business expenses, tax. Get ready to get refunds to the max, diving into income tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business Tax Year 2021, income tax formula line 1, income, which would have a sub-schedule, basically an income statement with income and expenses. We're focusing here on the expense side of things, expenses basically being deductions, the net then rolling in to line 1 of the income tax formula and page 1 of the form 1040. We see here on the tax return, we would basically have the schedule C, bottom line rolling in to schedule 1, bottom line rolling in to page 1 of the form 1040 line 8. We see here, this is the schedule C, profit or loss from business, basically an income statement. We're now looking at the expenses. The general rule for the expenses are they got to be ordinary and necessary. Expenses for taxes, unlike with real life, are good. We like expenses because they're basically deduction. We want to think about the expenses here specifically related to the business expenses, not other expenses that possibly could be deducted elsewhere, for example, on say like a schedule A when you're thinking about things like taxes. So we're on the taxes. You can deduct on schedule C various federal, state, local and foreign taxes directly attributable to your business. So like with any of the other business deductions, they got to be ordinary and necessary. They got to be linked to the business like with many of the other deductions. That's where some of the confusion comes into place as to one, is it something that's going to be a deductible item just in general, given the nature of the tax and taxes being somewhat confusing in and of themselves. And then two, is the tax something that's going to be deductible just on the schedule C or are we paying taxes that are kind of more general taxes that we might have to allocate, for example, between schedule C and possibly some other place or have some portion deductible on the schedule C. So we've got income taxes. You can deduct on schedule C a state tax on gross income as distinguished from net income directly attributable to your business. So that's kind of a specific type of state income tax, which is designed a little bit differently than the federal income tax. And you will probably be aware of it if you are subject to an income tax on the grocery seats, maybe called a grocery seats tax. You can deduct other state and local income taxes on the schedule A form 1040. If you itemize your deductions, do not deduct federal income tax. So in other words, if we're looking at the income taxes, then we have the federal income taxes. We have the state income taxes. When we think about the federal income taxes, then obviously the schedule C bottom line of the schedule C, basically the net income is rolling into the first page of the form 1040. So therefore we're going to be paying taxes on it income taxes on the schedule C business. But we can't really deduct the federal income taxes because we're using this calculation in order to calculate the federal income tax. If we were able to deduct them, we would have kind of a circle reference. So the federal income tax is basically out. That's the thing we're working on. Then you have the state income taxes. State taxes will differ from place to place. So if you have like a normal kind of state income tax, or if you have a state income tax that is designed or mirroring what we see on the federal side, basically the tax on the net income in your particular state, it's likely you might not be able to deduct that on the schedule C. But rather you possibly might be able to deduct it on the individual side of things on the schedule A if you're able to itemize, if your itemized deductions are greater than the standard deduction. However, if you've got a gross receipts tax, as we see here, you can deduct on schedule C a tax on gross income as distinguished from net income directly attributable to your business on the state side. So then we have the employment taxes. You can deduct the social security, Medicare and food to taxes you paid out of your own funds as an employer. Employment taxes are discussed briefly in chapter one. You can also deduct payments you made as an employer to state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as taxes. Now the thing about employment taxes or the is a it's a little bit confusing to calculate them. So you have to get into the payroll kind of side of things and understand the payroll a bit. It's also a little bit confusing because you have the payroll taxes, which includes social security and Medicare, as well as your self employment taxes, which include social security and Medicare, and they're kind of two different things. So if your schedule C business and you have no employees, then the net income that you will have is still going to be subject to kind of a similar thing as payroll taxes. But they'll be assigned to you. That's kind of like your net income. You'll be assigned self employment tax, which in essence is social security and Medicare that won't be reported on the schedule C. But you'll calculate that on the schedule SE and you can deduct half of it like we talked about in prior presentations. If you have employees, then you're going to deduct their what you pay to them in terms of their wages. And you're also going to have to withhold from them social security and Medicare and possibly state taxes and benefits and so on. And you're going to have to pay social security and Medicare on your side. And that's kind of like you can think about it kind of like a matching system. That's how they imagined it. So you're going to have to pay that social security and Medicare and how that's reported though can be a little confusing because you might then, when you're filling out your schedule C, try to tie in this information to the payroll reports, possibly to the 941s, the quarterly payroll reports, possibly to the W3, which is like a summary of the W2s. When doing that, just note that the payroll taxes that the employees that are the employee portion are going to be reported oftentimes on the income statement has just basically wages under the wages line because the taxes that you withheld from them are actually are actually their payments. So it would be like you gave them the money and then they took that money and gave it to the IRS. But what happened instead is you just kept the money from them and in theory paid the IRS basically on their behalf. And therefore that expense line, you're not going to call taxes on schedule C when it's their taxes, it's just their wages and they had to pay some of their wages to taxes. Then we had our portion that had to be paid over and above that, which we would generally be in another line on the income statement, which would be called the payroll taxes, our portion, social security, Medicare, federal unemployment tax, for example. So you could dive into that more detail in the case. Self-employment tax, you can deduct one half of your self-employment tax. Online 15 of the Schedule 1 form 1040 SE tax is discussed in Chapter 1. So the self-employment tax is different from the payroll taxes, although it's the same kind of thing. But this time we're calculating the social security and Medicare on basically our earnings, the net of the Schedule C as opposed to on the earnings of the employees based on their wages. And we get to deduct that, but we can't deduct it on the Schedule C. Well, we don't get to deduct the whole thing. We get to deduct half of it because what they're trying to do is mirror what happens on a corporation where basically the whole thing where we just discussed if you were an employee, an employer situation, you would get to deduct the portion of your portion of the payroll taxes for the C corporation and you'd get to deduct the employee portion as payroll. So now if you're treating yourself as both the employer and employee with regards to self-employment tax, I should get to deduct the half that is applied to me as the owner. And I can't do that on the Schedule C because that would create a circle reference problem. I could put that now on the Schedule 1 and above the line deduction or deduction for adjusted gross income. Then we have personal property tax. You can deduct on Schedule C any tax imposed by a state or local government on personal property used in your business. So that's going to be the general rule. It's ordinary and necessary. So yeah, deduct it. You can also deduct registration fees for the right to use property within a state or local area. Example, May and Julius Winter drove their car 7,000 business miles out of the total of 10,000 miles. They had to pay $25 for their annual state license tags and $20 for the city registration sticker. They also paid $235 in city personal property tax on the car for a total of $280. They are claiming their actual car expenses because they use the car 70% for business. They can deduct 70% of the $280 or $196 as a business expense. So also note, you have the same kind of issue here with regards to can you take the expense as a business expense? Well, it has to be, and if you're talking about something that is both business and personal, then you can come up with a question of what portion can I deduct on the Schedule C and then is there any other place I might be able to deduct it as well possibly on, say, Schedule A itemized deductions? So we got the real estate taxes. This once again, we come up to that same kind of problem where normally if you're paying taxes on something that's business related and it's not the federal income tax, you would think possibly you would get to take the deduction for it. But you could have situations such as the home where you're paying taxes on it. If you own the home, you'll have property taxes and I work out of my home. So I should get part of the deduction possibly in the business. Then you'd have to do some allocation, part of it being deducted on the business side of things, part of it possibly being then deducted on the Schedule A if you're able to claim the itemized deductions due to them being greater than the standard deduction. So you can deduct on Schedule C the real estate taxes you pay on your business property. Deductible real estate taxes are any state, local or foreign taxes on real estate levied for the general public welfare. The taxing authority must assess these taxes uniformly at a like rate on all real property under its jurisdiction and the proceeds must be for general community or government purposes. So for more information about real estate taxes, you can see Chapter 5 of Publication 535. That chapter explains special rules for deducting the following items, taxes for local benefits such as those for sidewalks, streets, water, mains and sewer lines, real estate taxes when you buy or sell property during the year, real estate taxes. If you use an accrual method of accounting and choose to accrue real estate tax related to a defined period, a rentable over that period. Sales tax. Treat any sales tax you pay on a service or on the person or on the purchase or use of property as part of the cost of the service or property. So when you're paying the sales tax, if you're subject to sales tax in the United States, that would be state and local tax, so that'll differ basically on the location. When you're paying the sales tax, then as the purchaser, you usually just put that in the cost of the thing that you are purchasing. You don't really say, I'm going to record the purchase of supplies at $30 and the sales tax I paid at $5 or something like that. You just say, no, I paid $35 for supplies, which includes the sales tax. When you're charging sales tax on the other side, you're selling something, then you're talking about the income side of things and how to treat sales tax on that side. In this case, we're looking at the expense side of things, meaning we're paying for the sales tax. And if it's a business related item and we get to deduct the item, then we're taking the deduction, not as, for example, supplies and sales tax, but rather as just supplies, which includes this part that we paid for sales tax. If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. So what if it's inventory? Well, still we purchased it as inventory. We're not going to deduct it at the point in time that we purchased it. We're going to put it on the books as inventory, an asset, and then we're going to expense the asset as cost of goods sold when we sell it. We are still going to include the inventory as the amount we kind of capitalize or put on the books as the asset as part of the inventory that we're purchasing. If the property is depreciable, add the sales tax to the basis for the depreciation for information on the basis of property. See publication 551 basis of assets. So if we buy something large, depreciable assets like equipment, and we pay sales tax on it, we're not going to deduct the sales tax. No, we're going to record it as part of the cost of the thing we purchased, the property, plant and equipment like a forklift, like a building or something like that. And it'll be included in the basis. Do not deduct state and local sales tax imposed on the buyer that you must collect and pay over to the state or local government. Do not include these taxes and gross receipts. So now you might think about, well, what about the taxes that I have to pay to the government? So in this case, I'm collecting the sales tax, I sell something, I collect the sales tax, and then I pay it to the government. You might think that when I pay it to the government, I should get a deduction for the sales tax. But the reason that's not generally the case is because we don't really want to record the income related to the receipt. So in other words, if you sold when you sell something and you have to charge sales tax, so if you sold something for $100, and then you had to charge sales tax of $5, you're actually collecting $105. That's a horrible $5105. When you record this on the books, you're going to receive cash, let's say of $105. The other side is going to go to revenue of $100, and then the $5 here isn't going to be included in revenue. Instead, it should go to a liability account because in theory, you are not the one charging that $5. The virus is just making you be the tax collector on that $5, and therefore you put it on the books as a liability, and then when you pay it to the government, you don't record it as an expense, you lower cash, and you lower the liability so that neither the $5 was neither recorded as revenue or as expense. You can imagine a situation that if they forced you to do this, you run it through the income statement by, for example, recording it as revenue at $105, and then when you pay the government, you record the expense of $5, which would net out to the same area of $100 net income. But that's not what we do generally. That's not what the IRS wants to do. The IRS wants to say that you're not the one charging the $5. Therefore, when you charge $100, the $5 goes in as a liability, doesn't hit the income statement. Then when you pay the government, it's just going to reduce the liability. Therefore, you don't get any expense for it because you didn't have to record any income for it either. So we have the excise tax. You can deduct on Schedule C all excise taxes that are ordinary and necessary expenses of carrying on your business. Excise taxes are discussed briefly in Chapter 1. You've got the fuel taxes, taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Do not deduct these taxes as a separate item. So if you've got taxes on the fuel that you're going to be doing in, especially if it's, plus if it's industrial taxes, in addition to the normal taxes on fuels, then, of course, as the general rule would be applied, would be included in the cost of fuel not broken out separately. You may be entitled to a credit or refund for federal excise tax you paid to fuels used for certain purposes. So for more information, you can see publication 510 excise taxes related to that.