 Income tax 2022-2023, business expenses, tax expense. Let's do some wealth preservation with some tax preparation. Most of this information comes from the Tax Guide for Small Business for Individuals who use Schedule C, Publication 334, Tax Year 2022. You can find on the IRS website, IRS.gov, IRS.gov. Looking at the income tax formula, we're focused online. Remember, on the first half of the income tax formula is in essence and income statement. Although just a scaffolding and outline other forms and schedules flowing into these line items, one of those, the Schedule C having business income minus business expenses, the business net income flowing into line one income of the income tax formula. First page of the form, 1040, noting that the Schedule C rolls into the Schedule 1, rolls into the form 1040 and line number eight. The Schedule C is a profit or loss from business form formatted in an income statement format. Income minus expenses, we're focused on the expenses here and specifically tax related expenses. Now you might be saying, hey look, I'm doing this to pay taxes or to report my taxes for the federal income taxes. How does it make sense that I get an expense? Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. And for the taxes, because if I got to deduct the tax expense, it would then reduce my income and reduce my taxes. It would be a circle reference. And that's because we're not generally talking about the federal income tax as something that can be deductible, but possibly other taxes that are business related that may be deductible on the Schedule C as business expenses. The general rule being the same as other business type expenses. Were those taxes ordinary and necessary expenses for the business? Did we need to do them in order to help generate revenue? All right, so taxes, you can deduct on Schedule C various federal, state, local and foreign taxes directly attributable to your business. Income taxes. So you can deduct on Schedule C a state tax or gross income. So now we're talking about the income tax. When we hear US income tax, you usually think federal income tax. But no, we're talking here the state income taxes. Remembering that the tax system on the states and local should be and generally to at least some degree is sovereign from the tax system on the federal side. Therefore, the state will use different tax systems. Some of those states having an income tax. Some possibly having a sales tax. Some of them like California tax really nearly anywhere they can type of thing. So right here, so we're talking about the state income tax. So you can deduct Schedule C a state tax on gross income as distinguished from net income directly attributable to your business. So once again on gross income distinguished from net income that is directly attributable to your business. So you can deduct other state and local income taxes on Schedule A if you itemize your deductions. So this is where it gets a little bit messy here because if you're in a state that has an income tax type of system then the question is, well, do I get to deduct the income tax on my federal taxes? Do I get to deduct the state income tax for the federal income tax? Now when you're talking about individual tax returns that don't have the Schedule C then you have taxes that could possibly be deductible on the Schedule A if you're itemizing as opposed to taking the standardized deduction because the itemized deductions are higher and so then you might be able to deduct those state taxes on the Schedule A although there's a threshold and a limit to how much you can deduct I believe like 10,000 but now you have a situation where maybe some of the taxes are attributable to the business on the Schedule C in which case you may be able to take some deduction on the Schedule C which might be particularly beneficial if you're not itemizing because in that case you would have been able to get the deduction on the itemized deductions in that case. Okay so you don't deduct the federal income taxes, that we know so employment taxes, federal income taxes that is you don't deduct the federal income taxes. Employment taxes, you can deduct the social security, Medicare and food taxes you paid out of your own funds as an employer so this is going to be distinguished from the Medicare social security that you pay on your self-employment tax so we have that distinguishing factor here between the taxes that we are paying as the sole proprietor in this case and the taxes that are going to be paid to our employees or paid by us on behalf of the payroll taxes to our employees so if we have employees as a sole proprietor we're going to have to do the payroll thing we're going to have to make the withholdings the employee pays half of the social security and Medicare and then we have to match half of social security and Medicare as well as FUTA, federal unemployment tax and possibly state payroll taxes as well and when we report the expenses for our payroll then the taxes that are social security and Medicare that are included as the employees portion that were withheld from the employees are just part of their wages we just paid it to the government on their behalf but we also have the taxes that are our taxes we had to pay not on our income but on our expenses meaning on the employee's income which is the social security, Medicare and FUTA our portion that would be the payroll tax expense then we're also going to be paying social security and Medicare for our own income which is basically the net income of the Schedule C after deducting these items which is then going to be used to calculate the self-employment tax which is basically similar to the payroll tax which is our portion of social security and Medicare employee and employer portion that we have to calculate that tax on and in half of that we get to deduct not on the Schedule C you'll recall when we did the self-employment thing but rather as an above the line deduction so that makes perfect sense it's all quite clear and simple to do right so you can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund deduct these payments as taxes so we've got the SE tax, self-employment tax you can deduct one half of your self-employment tax on line 15 of Schedule 1 Form 1040 so that's different than the payroll taxes that were given to the employees the self-employment tax is calculated based on our net income in essence from the Schedule C but we get half of that as a deduction that we've seen in prior presentations it's not going to be on the Schedule C as a deduction because if it were it would create a circle of reference because if I got to include the deduction on the Schedule C it would reduce net income which would affect the tax calculation of self-employment tax and then I get half of that as a deduction so you have to put it somewhere else it's going to go on the Schedule 1 our self-employment tax is discussed in Chapter 1 of Chapter 10 so we'll talk about that later or have talked about that before personal thing property tax so you can deduct on Schedule C any tax imposed by a state or local government on personal property used in your business so once again this gets a little bit confusing because if it was if it was property you might think that I get a deduction on like a Schedule A or something but we're talking about property that is used for the business and now you've got the property tax on it so then you may be able to deduct it on the Schedule C since it's a business related tax if it was something like equipment then it would be fairly straightforward if you're talking about like the tax on a home then if it was personal use home only then you may be able to get a deduction on Schedule A but if it's business use of the home then you might be able to get at least a portion of that due to the home office use of it on the Schedule C so you can also deduct registration fees for the right to use property within a state or local area so example May and Julius winter drove their car 7,000 miles out of a total of 10,000 miles they had to pay $25 for their annual state license tax and $20 for their 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 as opposed to the mileage method here because they use the car 70% for business they can deduct 70% of the $280 or $196 as a business expense so back to that car example remembering that with the car example you got to think about actual versus the mileage method and so on we talked about in prior presentations real estate taxes you can deduct on Schedule C the real estate taxes you pay on your business property so here's what I was talking before basically a real estate property tax on the home often times or real estate if it's an office building then it's not a home and that's pretty straightforward that you would think you'd get to pay the property tax if you have the office building for business so the tax would be a business related item but if it was your home and you use part of it for business then you might have to apportion part of the tax for property taxes between the Schedule A if you're able to deduct on a Schedule A because your itemized deductions are greater than the standard deduction and part of it on the Schedule C for the business use using the home office deduction possibly so deductible real estate taxes are any state local or foreign taxes on real estate levied for the general property welfare so 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 for more information about real estate taxes C Chapter 5 of publication 535 that chapter explains special rules for deducting the following taxes for local benefits such as those for sidewalks streets, water mains and sewer mines 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 definite period rateable over that period then we've got the sales tax treat any sales tax you pay on a service or on the purchase of used property as part of the cost of the service or property so sales tax another kind of interesting type of situation remember in the United States we don't have generally a federal sales tax so because our federal tax system is primarily the income tax system but on the state and local level we might have a sales tax which is basically a tax applied when we purchase something so then they're going to tack on the tax now remember if you're talking about non business items we have this whole thing can you deduct sales tax on like the schedule A for example because it used to be you can only deduct like state income taxes on schedule A which was kind of unfair to like states that have income taxes we're kind of taking advantage it seems to me a little bit and that would be like California and New York by subsidizing with a big income tax because they get deductions for the income tax and so on so then they had the sales tax because other states don't do the income tax they want a tax with a sales tax system so then they had to adjust it and say and think about whether or not you can deduct part of your sales tax for the schedule A but now we're talking about the business property if it's business property then can we deduct it on the schedule C usually yes the things that you buy for business property whatever you paid for it it would be included in the cost that you paid for it on the schedule C so in other words you typically would not be breaking out sales tax as a separate line item on a schedule C but rather it would just be included in whatever you purchased if you purchased supplies and it included sales tax you're going to record supplies expense for the amount including the sales tax which is usually fairly easy in that situation if you purchased equipment however that's long lasting then we can't write it off as an expense because we have to put it on the book it says an asset and depreciated it over its useful life although we might get that special or 179 deduction to take it in year one but we still have to do that method and that would mean that the sales tax would be included in the cost the basis that we're going to then allocate and depreciate so if the service or the cost or use of the property is a deductible business expense you can deduct the sales tax is part of that service or cost if the property is merchandise I want to merchandise bought for resale the sales tax is part of the cost of the merchandise so if you buy inventory and it had sales tax and you're going to resell the inventory you're going to include it in the cost of the inventory so if the property is depreciable add the sales tax to the basis of the appreciation for information on basis of property you can see publication 551 do not deduct state and local sales tax imposed on the buyer that you must collect and pay over the state or local government do not include these taxes in gross receipts or sales so sales tax gets a little bit confusing sometimes when you have to like charge sales tax so let's say that we're selling stuff let's say that we have a schedule see business we're selling inventory or something and we have to charge sales tax on it so there's a couple ways you can imagine that to happen you might just say hey look the sales tax is part of the sales price that's how much people are going to have to pay me so I'm just going to include it in income which is not the proper way to do it according to the IRS but I'm going to just for an example I would include it in income and then when I pay it to the government then I'm going to have an expense related to sales tax expense and that way the income minus the expense that's related to the sales tax would in essence get each other out and that's one way you can think of doing it but the IRS is saying we don't want sales tax on your income statement at all because the idea that the is that the sales tax isn't on you the business owner even though you're the one that has to deal with it you're just our collection tool that's all you are so you just collect the sales tax so we don't want you to record it in income or an expense so what you want to do then is is tax software is usually helpful to record the sales and record the sales tax not in income but rather as a payable account and then when you pay the sales tax you lower the payable account a balance sheet account so it neither the income nor the expense hits then the income statement and that confuses people often times because often times people do it correctly and they don't include the sales tax in income possibly because they're using accounting software like QuickBooks to help them do it properly but then they're like hey look I'm paying all this money to the government for sales tax I should get a sales tax expense but you don't have a sales tax expense because you didn't include the sales revenue in the income statement so your revenue is not there therefore there's no expense there it's both sides are off the income statement on the balance sheet so excise taxes you can deduct on schedule see all excise taxes that are ordinary and necessary for the expenses of carrying on your business excise taxes are discussed briefly in chapter one 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 so like sales tax these it should be included in this you're not going to break out the fuel tax you're going to record it as cost of fuel typically do not deduct these taxes as a separate item or refund for federal excise tax you paid on fuels used for certain purposes so for more information on that you can take a look at publication 510