 Income tax 2021-2022 tax software example, business owned and operated by spouses. Get ready to get refunds to the max diving into income tax 2021-2022. Lassert tax software, you don't need tax software to follow along but you might want the form 1040 which you can find on the IRS website at irs.gov, irs.gov, starting point single filer Adam Smith living in Beverly Hills 90210. This time we're starting off with the Schedule C business flowing in to line number 8. We could see that flow through by going to the Schedule C where we have the income at the 120, expenses at the 20, the net at the 100,000, that flowing into Schedule 1 here and that flowing into Page 1 of the form 1040. So we see it here, Page 1 of the 1040. We have the adjustments to income. That's going to be half of the self-employment tax that's being deducted that we saw in a prior presentation. And that's going to give us the 92, 935. We got the standard deduction at the 12,550. We then have the qualified business income deduction which we're letting the system calculate at this point. We might dive into that in more detail in a future presentation to get to the taxable income of the 64,308. We can see that in our Excel worksheet here. We're going to mirror that with the Schedule C. So the Schedule C then is going to be having the income and the expense 100,000 at the net here. That pulls into line 1. We then have the tax that is being calculated. We'll let the system do that with the added tax which is the 14129. That's the self-employment tax which is pulling over to the other tax item. We then have the above the line deduction which is the adjustment to income which is half of that tax which we see then on the adjustments to income, the 7065. Pulling that on over that gives us the AGI at the 92936. We've got the 12,550 standard deduction, the qualified business income depending on the software to calculate that to get us to the 64309. There's the 64309 off by dollar. That's okay. Page 2 gives us the 9,900 calculating the tax. We let the software do that and then we have the added social security and Medicare which is the self-employment tax 14129 to get us to the 2429. So we have the 2429. That's our starting point. So now let's make an adjustment by just going from single to married filing jointly. So if I go back on over here and say, okay, let's say we go from filing status, Adam gets married to Eve. So we'll hit the dropdown, married filing joint back on over to the reports. Now we have the filing status, married filing joint Adam and Eve Smith and we still have the 100,000 but the question is, is this tax return being applied to Adam or Eve or is it some kind of joint return? And note that as the flow through happens, you might say, well, what does it really matter because they're filing the joint return? But again, it could have implications in terms of the self-employment tax if nothing else. So if we leave it the way it is here, we're going to say if I go to the Schedule C, we're going to say it's Adam's Schedule C at this point in time. We could do the same thing for applying it to Eve. We're going to say it's Adam's at the starting point. So we've got the 120, the 20,000 and there's the 100. An important component is that on the self-employment tax, then this whole self-employment tax that's being paid in, in particular with regards to the social security, which will impact the benefit payments coming to Adam at the point of retirement, is all being allocated to Adam under this case and then it's flowing through to the Schedule I still and then to the Form 1040. So we got the same 100,000 but now they're married filing joint. We got the standard deduction has increased. So I'll mirror that on our tax return. So now we've got the increase here, 25, 1. And then if I go back on over, we see the qualified business income deduction is 13, 567, 13. I'm going to let the software do that calculation here, 13, 567. That gives us the 54269. It's 54269 and then on page two, we've got the 6115 federal tax, letting the software do that, 6115. And then we still have the other taxes of the 14129. So there's the 14129, no change to the self-employment tax. Although there's been a significant change to the federal income tax because the self-employment tax is just being calculated on the Schedule C income. It's still at the 14129. If I add that to the federal tax, 20,244, there we have it here. Back on over to the forms, we're going to go back up to page one. So there we have it there. Now, of course, you could go back to the first page and say, well, let's say that the Schedule C was the spouses. So we could say, okay, now it's not the taxpayers. It's the spouses still fairly straightforward then because it's going to flow into the forms here and the same component. We still have the 54268. We're still at the 54268. We still have the tax bottom line at the 20,000 on page two, 20,244. And that matches 20,244 here. Although on the self-employment tax and on the Schedule C, we can now see it's allocated to Eve instead of Adam. And that's going to be important for self-employment taxes. You want to make sure you get that straight because the self-employment tax will now be calculated or added into Eve as if Eve's the one paying the taxes and therefore possibly getting the benefits if the social security system survives long enough to be paying out the benefits. That should be a benefit to her calculation as opposed to Adam's at that point. And then you have the more complex situation and saying, well, what if their joint, their filing a joint return or the sole proprietorship is basically a partnership between the two married individuals? Well, if none of the exceptions apply, then it would be just like any other partnership in which case you'd have to file another return in order to pick up and that would be a partnership return which would then flow through here with a K1 flow through. So instead of having a Schedule C then you would have to file another entity return which will not be taxed at that entity level because it's not a normal corporation but a flow through entity and then you'd have K1 forms that would flow on through to the individual tax returns here. So that would be a partnership situation instead of a sole proprietorship type of situation. And then if you have an exception, so for example, if you live in community property states which you've got this nice exception which makes perfect sense to me generally and that would be, well, if you're joint partners in the joint business that you're having and you want to split it, you know, you're thinking it would be split equally then and you're in the states which are community property states which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, then you might have the capacity over here to go to my partnership and say, let's say that it's a joint item here and then it would make sense that basically they're going to split the allocation. So now if I go to my Schedule C, I've got the same 100,000. If I scroll up top, it's Adam and Eve on the Schedule C and that's going to be important with the self-employment tax. You might say, what's the big deal? It doesn't even matter because it's going to be the same things going to flow through for federal income taxes and the payment of the self-employment tax, but this calculation is going to be important with regards to the self-employment. We've got the self-employment for Adam which is going to be allocated some of the payments that are being made for self-employment to Adam and some of them to Eve now. So we've got the split up of the schedule, self-employment schedule, which again is important because that will have an impact on the benefits that may be gotten in like retirement years from the self-employment. So if I go back then to the Schedule C, you've got the same flow through, no real impact here. And if I go to the 1040, we've still got the 100,000. We still got the 54,267. So that's going to be the 54,269. I got here 54,269. It's a rounding difference. And then I'm going to go to page 2 where we have the 20,245. And so we've got the 20,244. So basically, same numbers, a little bit of a rounding difference between the two there. So again, the immediate reaction would be what's the big deal because, you know, they're married. I'm on a joint return. I'm being treated as kind of like one entity with regards to taxes. So it would make sense to have the Schedule C if it's jointly owned, simply applied out and you come out to the same kind of thing here, although that's kind of a deviation from a normal kind of partnership situation where you'd have a separate return that flows through. Now, the other option we can have if you're not in a community property state or possibly if there's some other kind of allocation, then you can have the second exception, which is the exemption for qualified joint venture. So if it's a qualified joint venture situation, then you may have to actually make two Schedule Cs. So it would be kind of like you would have a partnership. The partnership almost would be easier in that case because you basically have a partnership, which is another entity tax return. You've got a file, which is usually more difficult, but then the income flows through to your 1040 and then you'd have just two K1s that you would be entering into your Form 1040 or possibly you would then have to basically have two Schedule Cs breaking out the income instead of breaking it out kind of evenly or in the format we did down here. And this might be the way you'd have to do it if you didn't have the exception of the community property. So even if it was an even breakout, so I'd have to go over here and say, okay, now I'm going to say that I got one for the taxpayer and I'm going to take everything. You might do it this way. You might enter everything into the system and so that you have your net income populated properly and then divide every line item. I'm going to take half of it out 60,000 take that out and that gives me 60,000 and then I'm going to go here and take out the 60,000. And so there we have that. So now we've got half on this one, which I'm going to put on the taxpayer and then I'm going to make another one and I would populate it basically in the same stuff. So it'd be restaurant. I'm going to say and it's going to be for food and services and it's going to be a full service. And then we'd have the information for one and I said to and this time it's going to be the spouse information here and then here I'm going to put the 60,000 and then here the 10,000. So I end up with the same spot, but now you got two forms. So it would look possibly something like this. I live in a community property state. So in any case, if I go down to the schedule C now, now we've got two schedule C's that are taking place. The first one for Adam and basically half of the income has been reported here and you get down then half the income is reported and I put 40,000 on the expense. Hold on a second. That's not right. That's not right back up top. We're going to say the expense. This should be a negative 10,000 negative 10,000. Okay, so there's the 50,000 on the net here and then if I go to the second one, we have Eve. So now Eve's getting half of each line item that adds up to the net of the 50,000. And that will be important even though you get the net adding up to 100,000 again, because when you go to the self-employment tax, we've got another kind of format of breaking out between the self-employment tax going to Adam and that of Eve, which is going to make it easier for the calculation. Again, the benefits are going to be important. So that's another way that you can imagine this kind of done. I almost think that if you're going to do this method, it might actually be easier to do the partnership return, which will flow through with the K-1s, but you know, this is an option possibly maybe it's easier. We can go then we can go to the 1040. And so once again, we end up with a similar situation with 100,000 flowing through. We then have the 54267. So we've got the 54267 about. And then we end up with in essence the same situation for the taxes being paid, 20,245. And we've got the 20,244. So it's another situation where you might just say, well, what does it matter? Either method works, put it on one spouse, the other spouse, most spouses, community property, joint or two, who cares? But again, it comes down to one, you've got it, you want to make sure the allocation is properly allocated so the liability is properly allocated and so on. And two, the self-employment tax is important because the benefits could be important and it'll have an impact on the calculation of the benefit calculations in terms of who's being allocated the payments, even though the payments are coming out of the joint, you know, the married couples, married couples accounts.