 Income tax 2022-2023, section 179, deduction tax software examples. 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. 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. Starting point here, single filer Mr. Anderson living in Beverly Hills 90210. No W-2 income, we're talking Schedule C flowing into line number eight. Recapping that flow, we've got the Schedule C over here, profit or loss from business income statement format, income minus the expenses, the net income then in essence rolling in to Schedule 1. And that rolls in then to the Form 1040 line number eight. We also have self-employment tax, which is happening from the Schedule C. The net income in essence rolling into the Schedule SE. And that's the self-employment tax, bottom line of it, the 14129 Social Security and Medicare flows into Schedule 2. There it is there, that flows into the Form 1040 page number two. And there it is right here. Half of that is deductible as an above the line deduction on page number one. So recapping that flow through, it goes from the Schedule C, net income, calculating the self-employment tax on the Schedule SE. And so there it is. And then half of that deductible, the 7065, which flows into Schedule number two. And there's, I'm sorry, that's flows into Schedule number one, page number two. There's the 7065, that flows into the Form 1040 page number one. So now we've got the 100,000 minus the 7065 gets us the 92936 standard deduction, 12,950. In this case, we've got also the qualified business income deduction using the system to calculate that at this point. 63988, page then number two. Tax at the 9,692 plus the 14129 of the self-employment tax gets us the 23821. We're going to say that we put in 30,000 to get to the 6179. We are of course focused now on the Schedule C. So let's go to the Schedule C. We're focused on the depreciation. So in prior presentations, we looked a little bit at the makers and note when you're thinking about depreciation, that's how I would kind of think of these things. The makers depreciation, well first straight line depreciation conceptual concept of what it is. And then the makers depreciation rules are the underlying rules that you would expect to continue forward, no matter what else happens with the weird stuff. And then the weird stuff is the 179 and special or bonus depreciations, basically kind of overlapping on each other at the current point in time. And we'll see what happens in the future because right now it seems like the economy is overheating, which is usually when they would pull back theoretically from special and 179 depreciations. But that's an unpopular thing to do, so we'll see what happens going forward. Now I would kind of layer my thought process on what's happening so you can kind of keep up with things from year to year. So now that we have a general makers understanding, let's focus more specifically on the 179. So just to recap, if I was to just enter something into tax software, let's say it was machinery, and I'm being generic again, maybe even misspelling it. But the idea being in practice, you would want it to be more specific, of course, so you can determine exactly what machinery you have. I'm being vague here so we can practice just the concept. Let's say we put it on 011522 and let's say that the cost is once again 10,000, let's say, and the method, let's say this is going to be the five year makers method. And so there we have it. Now if I don't do anything else, if I don't restrict the system from putting in like the special depreciation or bonus depreciation, it's going to put the full thing on there because it's assuming that it's going to default to the full special depreciation. And I'm going to go to the regulars table so we've got the cost, we've got the special depreciation categorized in our worksheet here and that then reduces the basis. So that's what the full thing is being taken. Now 179 works kind of in a similar way and these two things are basically overlapping at this point in time. Now there could be specific reasons why you might use one or the other, but for now we want to focus mainly on the 179 and analyze them in essence separately. So I'm going to suppress the special depreciation and then we'll look at the normal makers and then we'll add the 179. Okay, so now I have removed the special depreciation and we have not yet added the 179. So now we just have the normal makers depreciation, which is a double declining half year convention, which we saw in prior presentations would basically be the 10,000 in the first year divided by let's do a straight line first. So if it was divided by five years, it would be 2000 a year. If I divide that by the 10,000, the rate is 0.2 or you could do that by one divided by five. The number of years 0.2 times two, that would be 40%. So 40% is the double declining rate times 10,000 would be 4,000 in the first year. And then if I divide that by two, that's how we get that 2000. It looks like the straight line rate, but it's really the double declining with that half year convention. Here's what it is in year number two. So now let's basically go back on over here and add the 179 to it. So now if I add the 179, I've got the 10,000 and the 179 current 179 bonus here. And so now my depreciation has basically been consumed in the first year in a similar fashion as we saw with the special. If I go back on up to the schedule C, that knows the 179. One of the differences between the two is it's a little bit more flexible sometimes, but the bottom line is the 10,000 is applied again. So if you're a small business, it may be likely that your thought process goes like this. Is this something that I have to put on the books as supplies or something like that? Or do I have to put it on the books as an asset? You might have to put it on the books as an asset if it's a long term depreciable property. Then you put it on the books as an asset, but and you go through all the trouble of doing this depreciation schedule. But then they give you a 179 or special depreciation, which means you basically get to expense it just like if you were on a cash basis in the first place, which is kind of a tedious kind of thing. But that's because the tax code is keeps changing when they're trying to stimulate the economy and whatnot. And so they go from a makers to these to these kind of stimulative policies of the 179 and the specials. Now you can also see this going through the form 4562. So now we have the form 4562 part one election to expense certain property under the 179. So you can see the 179 has a bit of flexibility in making the election possibly more so than the special or bonus depreciation. So maximum maximum amount is the 1,080. Quite a high limit for many small businesses, larger companies can clearly hit that fairly easy total. And then the threshold is 2,070. So meaning it could we talked about these rules when we went to prior presentations. If you go over the two 2,070 can affect how much you can deduct dollar limitation and then the five year machinery and so on. And then then the 10,000 being in essence taken. So if I substantially increase my income limit over here, let's say my income was let's say my income was like 2 million. Then and I go to my 179 deduction. And I say that I had my property up top where's my property. Let's say let's say I put this on the let's say this was 1,500,000. Then I try to take the whole thing 1,500,000 of 179 and I go back to my forms and it basically limits it to the 1,080 because that's basically the cap. So again fairly high cap for most businesses, small businesses, although again, you know, larger, you know, mid to large businesses can clear that cap at some point. So there's the amount. Notice if I go to my depreciation schedules then here, then let's see the regular depreciation. Now we've got the 179 is that the 108 now the depreciation basis has been adjusted. So now the depreciation basis is going to be the new basis that's going to be used to calculate the normal makers. That's why I would think of the 179 is kind of layered on top of the makers. So I've got the 1,500,000 minus the 108,000,000 and that's the 420 which is basically your basis now to do the double declining half your convention. So if I take that times the double declining rate which is 0.4, 1 divided by 5 is 0.2 times 2.4 or 40% times 0.4. That's going to be the 168 here. And then if I take that half your convention divided by 2, I've got the 84,000. So the 84,000 is the normal makers depreciation plus the 108,000,000. That's where we get the 116400 that's over here on the schedule C. Now you could also have a situation where the property is split for example between business use or personal use. So let's say it was like 80% of business and if I go back on over now I've got the 8,000 if I go down to my depreciation. They depreciate the moment you drive them off the lot. I can see okay, let's do not the AMT. Let's say now we've got the 10,000. I put it on the books for what it cost but then 80% is the depreciable portion and then I told it to depreciate the whole thing, the 10,000. But obviously it limited it to 8,000 because 8,000 is the portion that would be business related that I would get a deduction for. Now if this drops below 50%, let's say that I have this and it's only 40% for business, then I go back on over. Notice no 179 deduction is populated because I went under the threshold of 50% business use versus personal use. So therefore it defaulted to the 4,000 meaning the 40% business and using just the makers depreciation to get to the 800 of depreciation. Let's do another example with a cap here on the limit and show the flexibility possibly with the 179. So in 2022 you bought and placed in service 1,080,000 in machinery. That's the cap we can't go over that and 25,000 circular saw for your business. You selected deduct 1,055,000 for the machinery and the entire 25,000 for the saw a total of 1,080,000. So let's see what that does on the election. So let's mirror that we're going to say that we had machinery and I'm going to say that this was put on the books for 1,008,000. But we're not going to take the whole thing. That's too many zeros. That's one too many zeros. We're going to take the deduction of 1,055,000 and let's say this was a five year property. Let's say and then the second piece I'm going to say add was a saw to let's say what this was on 0,31522 and that was for 25,000. So I'm going to deduct the whole 25,000 here and let's say this was 53 as well and we're not going to deal with the special depreciation. So notice the total down here is 108. That's the cap. So notice what I could try to do is I might I might say, hey, look, I'm going to try it. Let's do this again. This should be 1,080,000. That's what it should be. I'm going to try to take the whole thing. Right? What if I did this 1,080,000 and 25,000 I'm over the cap. It won't let me deduct all of that. So if I go back on over to the forums notice what it did. It basically said the first thing I entered the machinery at the 1,080,000. It basically applied the 179 to that to that line. Let's look it over here. 179 applied there and now the basis is at zero. So I can't deduct anything going forward and then for the saw it used the normal depreciation of the 25,000. So it applied it just kind of in order and didn't allow me to take all the 179 that I put into the data input. But I have flexibility here because I could say, well, what if I wanted to apply it in a different way? Because maybe these two things have different classes. Maybe this is like seven year property or something like that. And for whatever reason, I want to have the 179 applied more to the seven year property because possibly the five year property. I'll be able to recover sooner than the seven year property or something like that. So I could say, well, I know the cap is at the 1,080,000. So let me do this then. I'm going to say I want to take the full 25,000. I'm going to take the 108,000 minus the 25,000 and say that means that I can take up here only 105,000. And so there's how I want to allocate it. So there's how I want to allocate the cap. There's the flexibility. So now I can go back on over and now this machine, which is a different five year property instead of seven years has the 105 allocated. So that means the depreciation still outstanding for future periods is 25,000. Now on the depreciable property that's going to get depreciated sooner because it's five year property as opposed to the other property, which is seven year property. So I'd rather have the 25 possibly in that case up here if I'm going to be capped at the 108,000 for the 1,080,000 for the 179 deduction. So that just kind of shows some flexibility and some of the concept of the 179, how it affects the basis so that you then apply the maker's depreciation after it's been reduced for the 179. Now the other weird thing is if we go way over, then we have this reduction of the cap. So for example on this one in 2022 Jane Ash placed in service machinery costing 2,750,000. This cost is 50,000 over 50,000 more than the 2,700,000. So Jane must reduce the dollar limit to 1,030,000. So let's do that. I'm going to go back on over and check that out. So let's say my schedule C income is like five million. So I have income here and then I'm going to say on my deductions, let's say that I'm going to say this is all of them. And let's just do one at a time. So I'm going to delete the second one and we're going to put this piece of on the books for it. What's going on the books for 2,750,000. And then I'll try to take the whole thing at 179,270,000. But it's going to be capped, of course, to do that. And I think that the method will just keep the same method and check it out. So if I see what it does here, we're going to say the cost is at the 2,750,000. Notice the cap then got adjusted to 1,030,000 because I was $70,000 over the threshold. I put it on the books at 2,750,000. And this cost is $50,000 over that threshold of the 2,070,000. So instead of getting a cap of 1,080,000, I had to subtract out 50,000 from it to get to the 1,030,000. So when you get into that range, the upper range, then you've got to obviously take that into consideration as well. And then, of course, you need to layer what's going to happen here with what would happen with the special or bonus depreciation as you go forward. But keep that adjustment in mind. Now, we also might be limited to the amount of income we have. So let's go back on over here and let's bring our deduction back to 100,000, 100,000. And then let's go to my Schedule C and say the Schedule C is, let's say, 60,000. So now I'm going to have less income on the Schedule C. So if I go back on over to the Schedule C, 60 minus the 20 advertising that we had is bringing us down to basically income of zero down below, right? Because I'm being limited on the 179. So if I go back on over then and I look at the regular, so now I've got the cost and the 179 of the 100,000 here. If I go on over to the form 4562, we're looking at part one, election to expense certain property. So we've got the, there's the threshold. I didn't hit that threshold. I had the 100,000. So we could see down here, we're pulling that in. And then it's going to basically cap it at the 40,000, which is the type is the amount of income I have. And so carry over of disallow deduction to 2023 is the 60,000. You can see how basically that's playing out. We may still get a benefit from it, but it may be rolling forward to future periods. Now you'll note that if I go back on over to the form 1040, I didn't have any other income here like W2 income. So I only had basically the business income, which it in essence took down to zero because I had a loss which it basically limited the loss on. So let's say what if I added like income for W2 income? So I'm going to say I have, I have earned income. It's W2 income of let's say, let's say 40,000 W2 income. If I go back on over to the forms now. So now I've got income. Notice what is happening here. Now I've got the 40,000 that's being pulled in netting out. So I've got the 40,000 from the W2 income. And it's basically then netting out on the schedule C. In other words, if I go to my depreciation now, I've got the 100,000 here. If I pull into the 4562, then it's now capping it at 80,000 and the carryover disallowed into dis disallowed to 2023 is 20,000. If I then go to the schedule one, I've got the 4000 of the schedule C income pulling in now a loss that it's netting out against the income of the 40,000 here. So that's an, you know, so when you get, I obviously when you get into losses, then you want to be careful, you know, you got to be careful on what the iris is going to allow because remember the iris may limit the amount of losses. So anytime you're in a situation with losses, you've got to think what's the best, what's the best thing to do with regards to the losses because the iris is often going to be skeptical of the losses and being able to take them against other income. For example, now the other thing just to keep in mind is that if if we take the 179 deduction and then as we saw before the property when we saw it fall below the threshold of 50% for business use and then it and then it falls below 50% for business use after you took the deduction, then you might have to recap some of the 179 deduction. In other words, if I was able to take the 100,179 deduction, front loading the deduction here, and then next year, I no longer use this piece of machinery for business but converted to personal bringing it below the 50% threshold personal and business. Then, you know, business versus personal, then then I might have to have a recap kind of situation on the 179. So a little bit more rare of a situation. So I'm not going to go into it in detail here, but that's just, you know, the idea, the idea of that as well that could come into play if something is transferring from a business property that was depreciable and took the 179 to something that's going to personal use in a latter year.