 Income tax 2022-2023, business expenses, car and truck, expenses, tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example, Form 1040, populated using LASERT 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, irs.gov, irs.gov, starting point, single filer, Mr. Anderson, no dependence, no W-2 income because we've got the Schedule C, small business income rolling into line eight. Where does that come from? Schedule C on the left, profit or loss from business, basically an income statement, income minus expenses, the net income flowing into Schedule One, line three, flowing into the Form 1040, which is on line eight. We also know there's self-employment. No employment, no enjoyment. Tax, that's gonna be the Schedule C, net income, 100,000 bottom line, flowing into the Schedule SE, self-employment tax, calculated at the 14129, which flows into the Schedule Two of the 14129, which flows into the Form 1040, Page Two, not the income tax, but the self-employment tax. That's what we're talking about here. And we know half of that is going to be an above the line deduction. So Schedule C, flows in, net income flows in. 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. Into the Schedule SE, and we calculate the self-employment tax, and then we take half of it, 7,065, which flows into the Schedule One, Page Number Two, the 7,065, which flows into the Form 1040. So now we've got our income minus the 7,065, gives us the AGI 92935. We've got the standard deduction 12,950, and then we've got the qualified business income deduction that comes from Form 8995. We're gonna dive into that possibly in a future presentation, and that will get us down to our taxable income, the 63988 in this example, Page Number Two, calculate the federal income tax, and add the self-employment tax we talked about before. That gets us to the 28821, and then we're gonna say we paid 30,000 of estimated payments to get us to the 6,179. Okay, yes, that's our starting point. That's a long-winded starting point for crying out. I know, I know, but that's because it's a business income. So now we're thinking about the auto expenses. So if I go to the Schedule SE, then we've got our auto expenses and the car and truck expenses. Couple confusing things about the auto expenses. There's a couple ways that we can account for them. We've got the direct method. We've got the mileage method. Also, that's gonna mess things up when you get this information from a client, because if you're dealing with a small business, they're often not great at bookkeeping in the first place. Sometimes they are, sometimes they're not. So we might not have, so they might have something on their car and truck expenses related to the gas or mileage that they paid and so on, and the repairs and maintenance and whatnot, which makes perfect sense. But then the question is, how much of that information that they gave us is actually for business versus personal and do I wanna use the direct write-off method or do I wanna use a mileage method in which case all the stuff that they gave me for the car, I might have to basically eliminate, in essence, and put in the mileage method if that's the thing the method we think is most favorable to be using, which oftentimes it's like the easiest thing to do. So from a practical standpoint, then what are we going to do? We're gonna try to take the income statement. We're gonna try to look at all the stuff that's auto related. If it's the first time that we have this car on the books, then we might want to determine whether or not the mileage method or the standard method would be most favorable. In other words, which method would lead to the highest deductions, because we can't take both of them, not only for the current year, but also for future years into the future. So let's think about how that might happen. Let's first just look at the standard mileage method, because that's the easier kind of method to do. When you do the other method, the direct method, you might have to put the car on the books and depreciate it, which becomes a more of a complex process to be doing. So let's see if I can jump there. I can jump on over to the vehicle expense, and we're gonna say, okay, vehicle expense. So I'm gonna say, see if I can go through this form. This is gonna be a schedule C that we're gonna be dealing with. And then we're gonna say it's a vehicle information. Vehicle is used primarily by more than 5% owner. I'm gonna say yes, vehicle is available for off duty. I'm gonna say yes, no other vehicle is available for personal use. I'm gonna say, okay, no evidence to support your deduction. I'm not gonna, no written evidence to support your deduction. I'm gonna stick there. And then we're gonna say description of the vehicle. I'm just gonna call it a truck. And we placed it in service. Let's just say we placed it in service 010123. Obviously, if you have this in service in the prior year, then it would be easier because if you're using the same software, it would be populated and you might have an organizer that can help you get all this information. Now the difficult part, the total mileage. So when you're talking to a client or something like that, you gotta think, well, what are the total miles, the total miles that you drove on the year, right? I'm gonna say like 10,000. And then we might say, okay, well, how much of those total miles are gonna be the business miles? Now this gets even messier because the business miles have a different rate for the first half versus the second half of the year. Due in part, I believe to inflation, right? So they had to increase the mileage rate in the middle of the year. So it might be something like, okay, 10,000 total miles. I think it was 80% business that we drove it. The more specific you can get on this, the better, right? I'm just giving some examples here. Okay, 80% business. And do you think we drove evenly over the first and second half of the year? I'm gonna say, yeah, we'll say it's even divided by two. So let's say it's 4,000 for each. Now obviously, if you're heavier weighted in the second half of the year, that would probably be more favorable because the rate was higher, I believe, in the second half of the year due to inflation. And then you've got your commuting miles, which a commute for a business might be just your commute from the office to the business or something like that. So let's say that's 1,000 miles, right? Because if I drove 10,000 miles minus the 8,000 for business and then commuting was 1,000, I'm gonna say, okay? And so this is just an example. Obviously, the better you can track the mileage, meaning every time you go and drive, like if your business is that you go and drive to a client from time to time, you might wanna map out the miles and see how many miles you drove for business-related items. And that would be a lot more specific than just trying to say, oh, I drove, I think I drove about 10,000 miles and like 80% for business and like my commuting, that would be more specific. So obviously the auto expense is a large expense oftentimes, which means it's one that if you were to be audited, the IRS might question about what support I'm on. And so the more documentation you have on your miles, the better, the better to be able to say, these are my total miles and this is, I have evidence of all these trips that I took with a Google Maps or whatever that I took down and I logged down my miles that I drove because I know that this is gonna be an issue with the taxes and I can't just basically track my gas spending if I'm gonna use a mileage method and so on. So if I just pull that on over and say, okay, what's that gonna do? And then we can come over here and say, okay, there's what threw down on line number nine, car and truck. Now note that of course is gonna be different than what your client gives you on your income statement because they're not tracking their stuff on a mileage method. They're just paying, they're tracking out how much they paid for it. So you're gonna have to make like an adjusting journal entry. That's kind of like a bookkeeping thing. Sometimes you can use a tax worksheet to do an adjusting entry. I won't dive into that in a lot of detail here, but we do have some courses on that. Maybe we'll touch on it later. So that's gonna be, let's see the calculation here. So then we've got the total mileage, the 10,000, the business. Business? What business? This mileage here, this is the data input we put in place and then total miles. So the business use percentage divided by line five, line two, 80%, meaning it's taking the 8,000 divided by the 10,000. That's the 80% business versus personal percent ratio. And then we've got multiply line three by the 58.5. That's the 4,000 up top. Multiply line four by the 0.625. So notice the rate went up for the second half of the year. So if you drove more in the second half of the year, then you would wanna make sure to wait the second half of the year instead of evenly 4,000, 4,000. You would want more on the second half of the year because the mileage rate is higher for the second half of the year. That gets us to the standard mileage rate of the 4,840. And that's where it pulls in here. So it's comparing that to the actual miles as well. Now, notice if we do that standard mileage rate, we can still add parking fees and tolls. So I can go back on over here. I can't add all the other kind of maintenance stuff, but parking fees and tolls, if I tack on, I had a rough year, I put 1,000 for parking fees and tolls because I just don't care where I park. I'll just, I get to deduct it, man. So then you can see it increased by another 5,000 or 1,000 to 5,840. Okay, so if we did the actual method, we could put it into the depreciation schedule and try to do both of these and let the software kind of pick the one which would be most favorable. But you gotta be careful on doing that because it might be favorable in year one to do the direct write-off method, but then in year two to do the mileage method. But you can't do that oftentimes because the IRS is skeptical of you doing that because the reason you would do that is because the depreciation method, sometimes you're gonna try to use an accelerated depreciation method in year one, which means you're gonna deduct more in year one. So they want consistency, a little bit of consistency in the methods that are being used. So, but let's take a look at that. I'm gonna delete this piece and I'm gonna go into the deductions and let's go into our depreciation thing here. Now I'm just gonna put a generic truck here, but note in practice, you would wanna have the make, model, year of the truck, possibly the license plate number. That becomes really important anytime you're doing some kind of depreciation schedule because even though it might not cause a problem in the current timeframe in the future, when you sell the truck or do something to it or any piece of equipment, you need to be able to identify the piece of equipment that is actually on hand to what's on the depreciation schedule in order to take the appropriate action from the depreciation schedules. And that's a lot easier to do if you're quite detailed in the descriptions when you put them on the books. So I'm gonna say this is Schedule C or Form 2106. We're gonna get more into depreciation in future presentations. So I'm just gonna, I'm not gonna dive into it in too much detail just to show the difference between the two methods here for the auto and then we'll dive into depreciation more in the future. I'm gonna say this is as of 010122, the cost. Now note that the higher the cost of the vehicle, the more likely then it might be more beneficial you would think to do a direct write off method because the depreciation is gonna be more substantial. If you bought the truck for like $5,000 or something like that, it's more likely that over the life of the truck, you might wanna use the mileage method. For example, and if you bought the truck for a higher amount, let's say 60,000, it's more likely you're gonna be benefiting from the direct write off method because the depreciation might be substantial. Although it could be limited, then we got the 179 we'll talk about later and the special depreciations, which we'll talk about later. But note that when we get into the depreciation, you have to basically apply the proper depreciation method to the type of equipment that you have, in this case an automobile. So we have five year property makers that has auto limitations. And then we've got the straight line for auto limitations. Now, and then we've got the five year, 6,000 pounds with the limits applied. So it gets a little bit messy in terms of the item to pick. Just note that if it's over 6,000 pounds, you've got a big truck, then it might be thought of more as a piece of equipment as opposed to the mile to the standard automobile. And therefore you might have less limitations when you're thinking about maximizing the amount that you can get for depreciation. They're gonna be more skeptical with just a car that you're driving around to visit clients or stuff like that because you would think that if you could do that, if you were to just do that for business, you can get a pretty cheap car or a cheaper car to handle that kind of thing. And if you're driving a $200,000 car just to drive to different places, then they're gonna be skeptical of that. That's why you might have auto limitations here. So you could pick the straight line or I'm gonna pick the five year with the auto limitations. Okay, so that's gonna, we might dive into that more detail, 179 and future presentations for the depreciation, but for now we just wanna compare and contrast these two methods. So then I'm gonna go down here and I'm gonna go to the car. There it is. And I'm gonna say do, do, do. We want use of vehicle available for off duty. No other vehicle, vehicle is used primarily. That's, I'm gonna say that's true. Employers, no. And then I'm gonna put the mileage in here in a similar way as we did before because if we did not use this car 100% for business, then the mileage is gonna be a way that they're gonna do a ratio type of analysis. So let's this time say that we drove it for 15,000 total. And let's say that we're gonna imagine that we drove it 80%, 80% for business. So I'm gonna say if it was 15,000 times 0.8, that's gonna be 12,000 divided by two. So let's say we drove it 6,000 and 6,000 community miles, I'll say is 1,000. And okay, so now all these other expenses will also become relevant down here. So the parking fees, let's just say it was 60 this time. The gas, lube and whatnot, let's say are 700. Repairs, let's say are, let's say are 340, tires, 140. Let's say insurance, insurance, 390, miscellaneous, auto license, 100, personal property interest and so on, all these other items down here are possibly things that we can ride off, the primary one often being of course, the gas. So now we're trying to depreciate the cost of the car, which we have to allocate over the life of the car, but we might get some front loaded depreciation due to the depreciation schedules of the tax code instead of a straight line depreciation and we get these costs of us expenditures above that, like the gasoline and the repairs and whatnot. So let's go back on over and see what we calculate here. So now we've got our depreciation schedules being calculated, if I go to the schedule C, then notice we've gotten the car and truck to 1,396, but also we've got this huge number down here for the depreciation of the 15,360 now. So obviously that's a lot larger than what we had before in the mileage method. If I look at the comparison between the two, I could say, okay, the total mileage, 15,000. This time we said 6,000 and 6,000 each for a total of 12,000. That's an 80% business versus personal because we're saying 12,000 business versus personal, that percentage is gonna be applied then to both the mileage method and the direct method. So now we've got the mileage method. I multiply the 6,000 times the point, or they do one, five, eight, five, and that comes out to this. If I add those two up for the two halves of the year, 7,260 and then depreciation portion of the mileage is they're breaking out the depreciation portion versus the expense portion and so on when they're calculating the mileage method. And then here's the actual cost, gasoline repairs, insurance, and so on and so forth. And the big one is the depreciation which includes the section 179, which could be a big bump to the expense. So that gives us total expenses. And obviously we'll take the larger of the two in this case would be the actual method. Now if I compare and contrast what the software's given me between these two, I'm looking at these two lines and I say this is the actual method being used. Let's force it to use the percent method. Before I do that, by the way, let's jump over to the depreciation schedules. So now you've got your depreciation schedules here and notice it took this big, it wasn't one, it was the special depreciation. Another big thing that allows you to take a lot more depreciation in the first year in an attempt to stimulate. Stimulate your mind, man. The economy and stuff and also just because politicians, it's a popular thing to do because it's beneficial. So then we got that. But next year, if I go to 2023, then we still have a significant amount over here but you'll notice it's a lot less than the first year because we got that massive upfront depreciation. It's still front loaded and that means that the depreciation is gonna go down substantially the amount of expense we get from year to year under this method. So that could be another thing to consider when you're first putting it on the books because possibly what if the first year of operations, you didn't have much income, right? Like if your income was quite low, you only made like 30,000, then your rate, your tax rate that you're paying would be quite low as well. So maybe you don't want that big, massive depreciation in year one. Maybe you would rather have it in later years when you're planning on your income being higher where you're subject to more tax, higher tax rates, right? But in any case, let's go back on over here and try to force the other method so we can see the difference between the two. So here we go. So I'm gonna say do the standard mileage method. Do the standard mileage. So now it's only at the 7,000, 7,320. So substantial difference between the two. Now notice if I brought this way down though, like I can either say, well, I work like crazy and I have a lot of miles, which might increase the mileage method in relation to the direct method, or I might say, hey look, what if I just bought like a used truck for like $10,000? Then it becomes a lot different of a calculation as well. So then if I go back on over, I'm gonna say boom. So now it's still calculating at the 7,000 with the standard mileage method. But if I remove that and let it pick the method, it's gonna pick the higher of the two, it's still higher for the direct method and that's the one it picks. But we gotta be a little bit careful of that one because although that's quite beneficial in this year, it's not a whole lot higher than the other method, right? Cause the other method was coming out to, if I put a two there, it was coming out to 7,003 and this method is coming out to the eight, nine, three, 96. But if I go to my depreciation schedules down here, I can see that, that let's see the regular ones, that it took this massive special depreciation, all of it in the first year, right? That means next year I'm not gonna have anything, right? And so next year there's gonna be no depreciation. So it takes all of the depreciation in the first year. Whereas if I was using the mileage method, I might be able to clear total depreciation over the life of the vehicle that is actually higher than the cost of the vehicle or the basis in this case of the 8,000, right? Because I might be able to, I mean, if I was using the standard mileage method, I might be able to take this, I might be able to take the 7,320 for like 10 years, right? Whereas if I took this direct method, I can only get the depreciation portion of the direct method in like the first year. And you can see why that's a problem for the IRS, allowing you to say switch between methods, meaning if you take the direct method in year one, you're likely to try to take advantage of course, why wouldn't you take advantage of the special depreciation or at least the accelerated depreciation instead of having a straight line kind of depreciation method and therefore you took a bunch of the depreciation in the first year. So you can't, the IRS is gonna be skeptical of you then switching in year two to then to the mileage method where you're basically get a more substantial, you would have front loaded all the benefit that's the point of the special depreciation and the accelerated depreciation methods and then still get the benefits of the auto afterwards. That's why they're kind of skeptical of switching between one or the other. Now again, notice that the other thing to just kind of keep in mind here is if I had a substantial amount of income over here, I would rather have the deduction in year one than later years. But notice the deduction isn't limited to that 8,000 really, I still get this deduction up top even if I'm using the actual method, my gas and that stuff, but this one is kind of limited to the value, the cost of the vehicle. Whereas if you use the mileage method, it's not exactly limited, right? Because the mileage, because you might be able to keep taking the same deduction going forward and notice what our tax rates are right here. Just another thing to keep in mind, the marginal rate and the effective rate because we had a fairly significant amount of income. But if my income was a lot lower, let's say that we had Schedule C income, let's say our expenses, let's just bring the expenses up to 80,000. So that means that now on the form 1040, we only had like 30,000 pulling in here and my net income is only 12,393. So now if I go to my tax rates over here and I say, okay, let's look at my tax summary, my marginal rates are 12 and the effective rate is 45. It's kind of skewed because of the different self-employment tax and whatnot. But that's a big difference on that average rate, the 12 versus over here. Over here I had it at, I wanted to have it at 20,000. It was at 22, right? So there could be a big difference in the taxes depending on if you're at higher tax brackets. So if it's the first year of operations and you're putting the truck in place, in other words, and you had like a loss or if you had like a low income and you're expecting next year for your income to be much higher because you've got things all dialed in at this point in time, then it might not, in that case it's one of the exceptions to the rule that we would rather have the deduction upfront, right? That might be saying I don't want the deduction upfront if I can get it next year, because I expect my tax rates to be way higher next year because my income's gonna be higher next year and because the government's getting crazy in debt so you would expect them to increase the tax rates like crazy at some point in time once they realize that they're stupid. But so that's another reason that you wanna keep in mind between those two methods. So if you plug into the software, in other words, the two methods, it'll kind of give you an idea of which method is best, but you can't just think, well, which method is best in this year. You also gotta think, well, what method would be best over like the life of the use of this car and considering I'm gonna keep my business going next year and take into consideration income levels this year and in future years.