 Income tax 2022-2023, business expenses, tax expenses, tax software examples. Let's do some wealth preservation with some tax preparation. Here we are in our example, Form 1040 populated with 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. We're starting off with the single filer Mr. Anderson living in Beverly Hills 90210, no W-2 income. We've got the Schedule C income once again. Looking at those flow-throughs, we've got the Schedule C, which is going to the profit or loss from business. The net income flowing into Schedule 1, which flows into the Form 1040 page number 1, line number 8. We also have self-employment tax on that income, which is on Schedule C, or flows from Schedule C, net income, to the Schedule SE self-employment tax, calculating Social Security and Medicare self-employment tax. Then that goes to Schedule 2, which goes to the Form 1040 page number 2, right there. Half of that is deductible on Page 1, not on the Schedule C, but Page 1 above the line deduction, which we can flow through that. It's going from the Schedule C. 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. Net income used to calculate the self-employment tax, Schedule SE self-employment tax, tax evasion. Half of that then, 7065 in this case, flow into Schedule 1, Page number 2. There it is. That flows to the form 1040, Page 1. And so there is that. So 100,000 minus the 7065 gives us to the 92,935. We've got the 12,950 standard deduction. We've got the 15997 of the qualified business income being calculated by the software. Gets us to the 63,988 taxable income. Page 2 calculated the tax, federal income tax, 9,692. The self-employment tax, 14129. We're saying we paid in 30,000 for the difference of 6,179. Okay, we're focused on the Schedule SE now. The Schedule SE in essence being an income statement, income minus expenses. We're focused on the expenses and more specifically on the deductibility of ordinary and necessary taxes. Now, obviously this is the federal income taxes that we are working on here. So you can't deduct the federal income tax generally because if you were able to deduct federal income taxes, that would obviously create kind of a circle reference, right? If I got to deduct the federal income tax and then that's going to be pulling over to the 1040 and used to calculate the tax, that wouldn't make much sense. But possibly other types of taxes, maybe we possibly could deduct. Now, the taxes that usually pop into mind first are going to be the state taxes, which would be whether or not you are in a state that has income tax or sales tax, right? And so if you didn't have a business and you're thinking about the state taxes, possibly an income tax, that would usually be deducted on the Schedule A rather than the Schedule C. For example, if you're paying your income tax with a W-2 income, for example, with withholdings, let's just see that as an example. And let's say that we had W-2 income of, let's say, 100,000 and the state taxes, let's say, were, let's say, 15,000 just to make it over the standard deduction. So then that possibly would be deductible on the Schedule A, which would adjust you from taking the standard deduction to the itemized deduction possibly. It didn't push us over because there's a $10,000 cap on it. But if I go over to the Schedule A, you can see it pulling through here. If I go into the Schedule A, then there's the 15,000 capped at the 10,000. So that's often the first thing that comes into mind. And usually you'd be able to possibly deduct that on the Schedule A rather than the Schedule C for state income taxes. However, you can deduct on Schedule C a state tax on gross income, which is a little bit more unusual, as distinguished from net income, which is usually the way it normally works as an income tax system, directly attributable to your business. So that's kind of like the exception. So there is that. I'm going to go back on over. I'm going to delete the W-2 income. Back to the Schedule C, other kinds of taxes. What about payroll taxes? Now, note if you have payroll, as we discussed a little bit on the payroll side of things, that would be you have employees and now you're having to process payroll. So you've got the payroll taxes, which is different than the self-employment tax, although they're both like Social Security and Medicare. We're talking when we think about payroll taxes, the taxes that you as the employer are paying, not on your net income in that case, but on the expense of the employees. So in that case, if you had employees, as we saw in the past, you might have a wages here, which would be tying into what's on the W-2. Let's say that was 20,000. And then you might have taxes as well related to the payroll or would have to pay the payroll taxes. Let's say that is just 5,000. So if I pull that on over into our worksheet, 20,000 here for wages, the 5,000 is being broken out. Now note if you're doing the data input as a tax preparer, you might want to tie these numbers out to the payroll forms, which are the 941s filed quarterly typically and the W-2s and the W-3. And that often people get confused doing that because they get mixed up between what should be included in here as wages expense and what should be broken out as taxes for the payroll taxes. Because included in the wages expense is the employee's portion of Social Security and Medicare, which we as the employer took out of their wages, but it's still their money and then we paid it on their behalf because we're forced to to the government. So we're deducting those not as payroll taxes generally, but as just wages. And then we had to pay our matching over and above their salary or whatever we're paying them of our portion of payroll taxes. And that's the amount that would be broken out here for federal income taxes. It would be our portion, our half, Social Security, Medicare, and that federal unemployment tax. So that's a form of tax we would expect to see on the Schedule C. Now the other one that's business related is what about our taxes? So we talked about the self-employment tax, which is calculated on our net income. Because we're being treated as both employee and employer of ourselves in essence in that we're paying not payroll taxes, because we're not issuing ourself W-2s, but self-employment tax, which is calculated here. We see that we were deducting this 10,598. Now is going to be the tax that we're paying on the 1040 page number two. Now over and above the federal income tax. Half of that is deductible. And once again, that one is not on the Schedule C, because if it were, it would end up in a circle reference. So we get that deduction somewhere else for our half of the payroll taxes. And that's going to be on the Schedule 1 page number two right there. And then that's going to pull into the form 1040 and be included in our line item as an above the line deduction. So those are some other forms of taxes related to the business. Now if we had like property taxes on things that we purchased for the business, like for example, if I purchased supplies and I'm just going to expense the supplies when I purchased them, then I'm not going to break out the sales tax that I paid for the supplies. I'm going to just record the supplies at whatever we purchased it for. So obviously if I bought supplies for $1,050 and $1,150 or whatever, and $50 was sales tax, I'm not going to break out the sales tax into the tax line. I'm just going to include it in the expense. And if I was to be purchasing inventory, then same thing, I'm not going to break out the sales tax, but I'm going to include it in what I purchased, which would be the purchase of inventory page number two and the cost of the stuff that we're purchasing. And if I purchased equipment, then I'm just going to include it not as an expense or inventory, but in the cost of the depreciable asset that I'd have to be putting on the books in the depreciation schedule so that I have to depreciate that cost over the use over the useful life. So those are going to be treated there. So you deal with the taxes and those items, but you're not going to see the sales tax broken out separately. It'll basically be included and expendable as it's not expendable, typically on the personal side unless you're deducting it on schedule A as your sales tax as opposed to your income tax on the schedule A. So you do get the deduction for it, but it's not typically broken out as a separate item. Again, it would be included in the expense item in the proper category or in inventory as part of your cost of good sold calculation or as equipment and then be expensed in the format of depreciation, which just still might be able to get in the year of purchase with the 179 and special depreciation. Now, the other thing that just brings up with the taxes is when we have this other thing with sales tax, sometimes we have to charge sales tax to our customers. And oftentimes people then pay the sales tax and they say, hey, look, I should have an expense here related to my sales tax that I pay because now I'm being charged sales tax. So remember, there's two ways you can kind of think of a sales tax system. So if I'm the one that's collecting and then paying the sales tax, you could say, well, I was charging whatever I charged for revenue, like $10, but then I had to charge $12 because of sales tax. And then you would be including the $12 sales in revenue that would then net out against the sales tax that you then pay to the government. That's one way you could do it. And the net income would then be increased by the sales tax on the sales side and then decreased by the sales tax on the expense side. And it would wash out. That's one way you could do it. But the IRS doesn't typically want to do it that way. They want instead to say, no, you are not charging revenue. The revenue isn't yours for the sales tax. You're just a tax collector. So you should put the revenue just include your sales price. The sales tax should go into a balance sheet account off income statement, which we don't see on the tax return because we only have an income statement with the schedule C. But if you're using accounting software like QuickBooks or something, it would be off on sales tax payable. And then when you pay the sales tax, you're just going to decrease the payable. Therefore, neither the revenue nor the expense hits the income statement. So oftentimes people will actually use tax software and that will correctly do that process. But then they're also going to say, hey, look, I should have sales tax expense because I'm paying all this money for sales tax. Why don't I get an expense for that? And the answer is just it's not just because, well, you just don't get that expense. Because you didn't include the sales tax in revenue. If it is in revenue, then we need to adjust the revenue to properly reflect revenue without the sales tax as the way it should be reported. But if it's not included in revenue, then of course you don't get the expense because both revenue and expense are off income statement. They're balance sheet items. Now the other thing that gets a little bit messy with the taxes is if you have like your home office again. So if you have your home office and you pay taxes for the home, then part of the home you're using for your business. So now you have a similar situation, breaking out the business versus the personal, which gets into the home office. And the reason that gets a little bit messy is because you can deduct some of the expenses for your home on the schedule A if it was just personal and you didn't have a business at all. That might be something that could be included in the taxes you paid section. So you might have already have a deduction for that possibly if your itemized deductions are greater than your standard deduction, but you might be able to allocate some of that then to the schedule C if you're not having any itemized deductions because you don't have more itemized than the standard, then the home office would be more beneficial in that case. But if you do, then you'd have to allocate possibly. You would imagine allocates. You can get into more detail on that with the home office if you're diving into that calculation. The other thing that muddies up that whole scenario is that cap that they tried to put in for the state taxes, I believe $10,000 for the itemized deductions, which kind of muddies up the whole situation as well. So to dive into that topic in more detail, you can look at the form 8-8-2-9 for the home office and dive into the instructions on that in a little bit more detail. Obviously, the basic idea would be if you have your home, you either own the home or you rent the home. If you rent the home, then you're not going to have any taxes for the property taxes on the home. And the main thing would be the rent that you're trying to see if you can allocate to a portion of the business. If you own the home, then you might have to deal with some more complexity, which would be, well, what about the depreciation related to the home? Would that part of that possibly be deductible? Because I didn't have to deal with depreciation before because it was a personal item. What about the property tax on the home? What about the interest payments on the loan related to the home that you might be able to apportion? And the reason that gets a little more complex is because you have other places where that might be deductible if you were taking itemized deductions in the Schedule A.