 Here we are in our example, Form 1040, populated with LISERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS, website iris.gov, iris.gov, starting point single filer, Mr. Anderson living in Beverly Hills, 90210, no W2 income because we've got the business income coming in from the Schedule C. Let's see that flow through process. Going to the Schedule C, profit or loss from business, income, statement, format, income, minus expenses, the net income in essence, going into the Schedule 1. Going from the Schedule 1 to the Form 1040, line number eight. We're gonna have to pay self-employment tax on that income. Let's see how that works. It goes from the Schedule C, bottom line, net income, flowing into the Schedule SE, self-employment tax, calculating that at 14.129, that's Social Security and Medicare. We're gonna go into the Schedule 2, that's right there, flows in 14.129, flows into the Form 1040, page number two, not the income tax, but other taxes down here, 14.129, the self-employment tax. Half of that's deductible on page one of the Form 1040. Right there, we could see that flow through by going to the Schedule C, net income, being used to calculate the self-employment tax of that 14.129, half of it, 7,065, flowing into schedule on number one, page number two, right there, and that flows into the Form 1040 right here. So now we've got the 100,000 minus the 7,065 gives us the 92,935 minus the 12,950 standard deduction and the 5,998, which is the qualified business income calculated by the software at this time, gives us the 6,398 taxable income tax calculated on page number two, 9,692 for the income tax and the 14.129 for the self-employment tax, gets us to the 23,821 total tax we're imagining we paid 30,000 for a difference of 6,179. Our focus now on the Schedule C, imagining we now have the business use of the home. So the general scenario is, we've got our own sole proprietor type of business, we have our home, which we might be renting or we might be purchased. We might have purchased the home. In either case, we use part of the home for business use. So we can imagine we have an office in some way, shape or form, some designated space that we're using within the home. Now, you would think that we would get to deduct part of the costs that are applicable to the business use of the home, considering the fact that you had to consume that business use in order to generate revenue. The problem that many of the expenses that you have are gonna be for the entire home. So they're personal and business. Therefore, we need to be breaking out the business versus personal portion. How could you do that? Well, we could do that possibly with a ratio kind of scenario, meaning we can take the square footage of the business use and divide that by the square footage of the total home and get a ratio, a percent in essence, that we can then allocate these costs by. We can use the form 8, 8, 2, 9, which we will take a look at. Let's open that up. We can also use, by the way, a simplified method, which may be okay to use, but may be low as well depending on where you live. If you live in like a high cost of living area, you're likely not gonna wanna use the simplified method because your cost of living is gonna be higher. And so that might be short. Also note that the deduction is flowing down here. And that's kind of an indication that in the reason they might do that or put it down here as opposed to up top is because there could be limitations in terms of how much you can deduct in the event that you have a loss situation. So if you have a loss, remember that if you have a loss here, that could pull to page one of the 1040 and be deductible against other incomes such as W2 income, if you had any, and that could cause issues, the iris is skeptical of that. So you might have limitations with regards to the losses. Okay, so let's go ahead and open up the form 8, 8, 2, 9, I'm gonna open that one up. Let's find that over here. So here's the basic layout. We've got the form 8, 8, 2, 9, business expenses for business use of the home. Part one, part of your home use for business and then figure your allowable deduction. Notice the two categories we have here, the direct expenses and the indirect expenses for the business use of the home. Let's jump on over. Let's see if I can do a jumping format here and go to the business use of the home. Okay, so if we're gonna use the percentage square footage method, what we would basically need to do is say, okay, the business use of the home, I'll pull up my trusty ruler and map out the square footage of the business area. And let's say that that comes out to, let's say that comes out to 700, let's say 300 and the total area of the home, which you might be able to find when you purchase the home, the square footage, you might be able to look it up online and see what the square footage of the home is, but you have to find the square footage of the home. If you're renting, obviously you could look at the rental agreement possibly to find the square footage of the home or look up online for the standard unit size of the home and whatnot. So we've got our two major categories, the indirect expenses and the direct expenses. So the general idea would be if it's an indirect expense, we're paying for something like the utility bill, for example, on the entire home and part of it should be allocated to the business use and that's when we're gonna have to use that percentage kind of method to do that. If it's a direct expense, that might be something that we're paying for directly to the office. So for example, if we're paying like repairs and maintenance for like the entire roof of the building, then you would think that you would have to use an indirect method and you would have to allocate it between the business and personal. But if you're doing repairs and maintenance for the actual office itself, then you don't have to do the allocation method because you're repairing the actual office which is full business use in that case. So that's the general idea. Note that up top we've got the mortgage interest and the real estate taxes and the state mortgage interest. Now these are gonna be deductions if you have the purchase of the home and they also become more confusing because you may be able to deduct these items on the schedule A if you're taking the itemized deduction. So then you gotta think about whether or not they should be allocated between itemized deductions and the business deductions. If you're not taking them on the schedule A, then you would think that you might get a benefit from them on the business side because you're not taking them on the schedule A because possibly you have standard deductions that you're taking as opposed to itemized. But if someone owns a home, usually that's one of the big items that pushes people over from the standard deduction to taking the itemized deduction. And then you run into that issue. Also, mortgage interest from an itemized deduction schedule A standpoint could be limited if the loan is over a certain threshold which could further complicate things. Usually would only happen on more wealthy individuals. Same with state taxes, for example, which are capped on the itemized deductions I think at like 10,000. So then again, that kind of complicates things as well with the state taxes. But let's first think about the renting situation because I think that's a little bit easier. So you've got insurance, miscellaneous, the rent. Let's say we're paying rent and let's say that that's going to be, let's just pick a number of 20,000 and rent. Now the repairs and maintenance, this would be if the repairs and maintenance were on the entire home, like the roof of the entire home and I need to allocate them between the two. So let's say that's 1200 utilities. Let's say that's 700 on the whole home and excess mortgage interest, state excess real estate taxes and other items. And then on the direct items.