 Income tax 2022-2023, items that are not income. Let's do some wealth preservation with some tax preparation. 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. 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 the IRS website, irs.gov, irs.gov. For focused online, one income, remember in the first half of the income tax formula is in essence an income statement. However, just an outline of scaffolding other forms and schedules, rolling in, flowing into these line items, that being or one being the Schedule C, business income having in essence an income statement in and of itself, business income minus business expenses, the net then rolling in from Schedule C to line one income of our income tax formula. This is the form 1040. We're focused down here on line eight. The Schedule C would flow into the Schedule one, which would flow into line eight of the form 1040. This is a Schedule C profit or loss from business where we can see the income statement formats of income minus the expenses. Okay, we're focused on the income side of things for the Schedule C business income. We talked about the things that are included in income because in no team that from the IRS perspective, they think of everything as in essence income unless there's an exception from it having to be included in income. So when we think about income, oftentimes the questions are, is this something that is income? Is it exempt from income? If it is income, is it going to be business income? Something that's going to be on the Schedule C or possibly income that needs to be reported in some other location. Now we want to think about those items that are not income. The exceptions to the rules, the ones that the IRS are going to say there's some kind of exemption too. So items that are not income. In some cases, the property or money you receive is not income. So we have appreciation. Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. So when property value, for example, real estate is a common property value situation where over time it's not going to go down in value, but hopefully go up in value, which is different from most other business property that you will have because most of the other business property is likely equipment. Equipment will generally go down in value. It will depreciate in value as there's wear and tear on the equipment. Buildings and real estate then could go up in value. The building still has wear and tear, of course, but just the value of the property could go up. And then the question is, well, if something goes up in value, do I have to record that as income? And the general rule is not until you realize the increase in the value, meaning you actually sell it and at that point in time you've realized you've gotten the actual money or equivalent something other than money in payment for it. And part of the rationale for that kind of accounting method would be that if, say, a building goes up in value, for example, if you don't realize it by selling it, then you haven't really actualized. We don't really know exactly how much the building went up in value for and it could go back down with market swings as market swings basically go up and down. If they charged you the income when the building or asset went up in value, then they would be charging you income when you didn't actually get any money for it. And that could result in situations you can imagine where someone has a tax bill that they can't pay because they charged them taxes on income that went up that they didn't actually realize so they don't have the actual money because they didn't sell the asset in order to pay the taxes. And that's not the situation that we want to see. Also, of course, the increases and decreases in the value of property are just estimates. If we see something like a building, it's unique in nature. There's no other building that's exactly the same. We could try to estimate what the value of the building is, but until you actually sell it, we don't really know what the value is. All right, you've got consignments. Consignments are merchandise to others to sell for you are not sales. So the title of merchandise remains with you, the consignor, even if their consignee possesses the merchandise. So this is a situation where you have inventory, but you're going to give your inventory basically to someone else, not for them to own and then resell as their inventory, but in essence, you still own it as the inventory. So like artwork, for example, if you were to give that to a museum or give it to even like a restaurant or something for them to display, but you still own it because you're basically using that facility, that area to demonstrate it for sales. So they're going to try to facilitate a sale in that way. Then that's the situation. So therefore, if the ship goods on consignment, you have no profit or loss until the consignee sells the merchandise because they're selling it in essence on your behalf. Merchandise, you have shipped out on consignment, is included in your inventory until it is sold. So even though it's not in your warehouse, it's in another restaurant or a museum. It's still in essence your inventory because they're acting as kind of like your store for you to sell the merchandise on your behalf in essence, taking a fee of course for that. Do not include merchandise you receive on consignment in your inventory. Include your profit or commission on merchandise consigned to you and your income when you sell the merchandise or you receive your profit or commission depending upon the method of accounting you use. In other words, if you're the one that's receiving someone else's inventory and you're the one that's going to be selling it on consignment, then again, it's not your inventory in that case. If I have a restaurant and I'm going to display paintings in the restaurant that someone else owns, then I don't really own the paintings in that case. I'm trying to sell them by displaying them possibly in a museum or whatever, something like that. Okay, so construction allowance. If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive in cash or as rent reduction from your landlord if you receive it under both the following conditions. So under a short-term lease of retail space for the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. That's a pretty special kind of situation for a special industry. Amount you can exclude. You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Short-term lease. A short-term lease is a lease or other agreement for occupancy or use of retail space for 15 years or less. So when we talk about lease agreements, most of us are familiar with them from an individual standpoint where we lease for like a year is a common type of lease for like an apartment or something like that. But when you're talking about building space for businesses, oftentimes the leases are going to be quite longer and more in-depth kind of leases because clearly the business is going to want to lock down a particular space for a longer period of time. So once again, a short-term lease is a lease or other agreement for occupancy or use of retail space for 15 years or less. The following rules apply to determining whether the lease is for 15 years or less. So take into account options to renew when figuring whether the lease is for 15 years or less. When you come up with these kind of rules about a lease being a lease that qualifies a short-term or long-term or whether it be a lease or a purchase and these kind of things, you can structure these types of agreements to try to maneuver around the definitions by trying to structure it a little bit differently. These are substance over form kind of questions that come into play. So you've got to take into consideration if you're able to extend the lease quite easily and it's quite likely that you're going to extend the lease, then maybe it shouldn't be a short-term lease in actuality because although it's structured as a short-term lease, it's pretty clear that it's going to be longer than 15 years the way it's been designed. But do not take into account any option to renew at fair market value determined at the time of renewal. So meaning if at time of renewal they're allowing you to renew the lease at fair market value, then that would be, you would think, more of an arms-length transaction. But if they're saying that they're going to renew the lease at something that's far less than fair market value, you would think they're trying to do something funny formatting it as a short-term lease in form, but in actuality it's a long-term lease. So two or more successive leases that are part of the same transaction or a series of retail transactions for the same or substantially similar retail space are treated as one lease. Retail space. Retail space is real property, least occupied or otherwise used for you as a tenant in your business of selling tangible personal property or services to the general public. Qualified long-term real property. Qualified long-term real property is non-residential real property that is part of or otherwise present at your real retail space and that reverts to the landlord when the lease ends. Exchange of like-kind property. So here we've got that like-kind exchange situation. Generally, if you exchange real property used for business, so we're talking real estate here, generally here, real property, used for business or held as an investment solely for other business or investment real property of like-kind, no gain or losses recognized. So we're talking real property, not typically your home, right? In that case, so if you're thinking about the like-kind type of exchanges, then you want to think about under what circumstances is it, could I structure something as a like-kind exchange? There's a lot of material on that so you could dive into that in more detail if you want, you could do a whole course in and of itself on basically like-kind exchanges. So this means that the gain is not taxable and the loss is not deductible, so for more information you can see form 8824. Leasehold improvements. If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. So the increase in the value of the property that they worked on is not income. So however, if the facts indicate that the improvements are a payment for rent to you, then the increased value would be income. So they did something to the property, right? They increased the value of the property because they worked on something that's not necessarily income. Because you don't have to report the increase in the value of the property as increase until you realize it generally. However, if they did something that increases the value of the property and you forego their rent for doing that, then they basically paid you rent by doing that work, right? So in that case you would think that there would be an income situation. Loans. Money borrowed through a bona fide loan is not income. So clearly if you need to capital, if you need to capital money to grow your business, capital either comes from you, equity, or from the business itself, meaning the income in the business, you're putting that back in the business, or it comes from outside sources such as loans. So loans are an inflow of cash at some point, but they're not going to be income because there's something that you're going to be paying back. They're going to be similar to basically renting a building or something like that because you're renting the purchasing power of something to purchase something, equipment if it's a business loan so that you can then use that equipment to generate revenue in the future and you're going to have to give the money back plus the rent on the money called interest, therefore it's not income when you got the money. So sales tax. State and local sales tax imposed on the buyer which you were required to collect and pay over to state or local governments are not income. So sales tax obviously like a usage tax, so you are the tax collector then of you're required to be the tax collector of in the United States the state or local area, the state and local sales tax because there's not generally a federal sales tax, it's the state and local thing which means that the tax in general or in theory is not on you as the business owner the tax is supposed to be on the person buying the goods and services just the tax collector. So you have to mark up the income with the sales tax and when you receive the increased price meaning if you were to charge $10 and you had to charge $12 you had to charge $2 of sales tax let's say that means that the $2 isn't revenue to you the $10 that you charged was revenue the $2 from a bookkeeping standpoint should go into a payable account sales tax payable and then you pay it to the government notice that you could the sales tax is a little confusing a lot of times because you could think of it as why don't I include the whole $12 as income and then when I pay the $2 out for sales tax I call that an expense so that would bring me back to the $10 $12 minus the $2 gives me $10 that's the same thing as just not recording either the expense or the income of the $2 and the reason we don't do that in theory is because again the concept is it's not income or an expense to you you're just a tax collector it's a non-income statement item you should put it on the books as a liability not as income and then when you pay the sales tax it's not going to be an expense and again as a bookkeeper or someone doing taxes you might get questions of people saying hey look I pay sales tax of sales tax to so I should have an expense of sales tax and you've got to then think well we'll know because if you properly didn't include the sales tax on the income statement then you're not going to have an expense of sales tax now if they did include income related to the sales tax they recorded the transaction at $12 instead of $10 they included the sales tax then you should reduce the income line generally to what it was including the sales tax so that actually gets a little bit messy tax software is helpful accounting software is helpful to properly calculate and track sales tax but sometimes people don't use accounting software so they have to come up with a system that works maybe without accounting software when they have to deal with sales tax and so you want to make sure you have an understanding of what's going on with it if you're dealing with sales tax