 Income tax 2021-2022, business income part number three. Get ready to get refunds to the max, diving into income tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business Tax Year 2021, looking at the income tax formula line number one, income. Although there would be a sub-schedule, basically an income statement, income and expenses, the expenses basically be in deductions. The net then flowing in to line one income of the income tax formula and page one of the form 1040. We see here where we would have the schedule C, the net flowing into schedule one, then flowing into the first page of the form 1040 line number eight, which we see here. Here is the schedule C, basically an income statement, income and expenses. We're kind of looking at the income side at this point continuing on with it. So now we've got the real estate rent, real estate rents. If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. who provides services like maid services for guests, report the rental income and expenses on schedule C. Now, the reason this is kind of important is because you got to distinguish between a schedule C that you would be reporting the rental income on and a schedule E. You might ask, what's the difference between these two schedules? Because they both look like sub-schedules that are basically income statements for some kind of business that have income and expenses, the net of which the bottom line flows in some way, ultimately to the first page of the form 1040. But there's a couple differences involved here as to whether you be on a schedule C or a schedule E. If it's on a schedule E, you could be subject to like passive activity rules where the IRS is mainly concerned, for example, with people that are well off people, for example, that might have a second property that they rent out and especially they're concerned with those losses. So if they have the losses, then that you could restrict, they might have some passive activity rules that restrict the amount of losses they can take against other incomes. So that's one concern. And we also could have like self-employment could be a concern as well, whether something be subject to self-employment. So if it's on schedule C, then it's subject to the self-employment taxes, but may not be subject to, it's not going to be having the passive activity kind of rules that may more likely be subject to if it was on the schedule E. So that's going to be the general idea. So if you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on the schedule E. So for more information, see Publication 527, residential rental property. So if it was residential rental property like someone's second home that they're renting out or something like that, more likely that you would have the schedule E that would be used. And if you fall into this specific category, if you are a real estate dealer who receives income from renting real property or an owner of a hotel or motel, then more likely that you should be using the schedule C's. So what then is a real estate dealer? You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent you receive from real estate held for sale to customers is subject to self-employment tax. However, rent you receive from real estate held for a speculative or investment is not subject to the self-employment tax. So then we've got the trailer park owner. Rental income from a trailer park is subject to the self-employment tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. You are generally considered to provide substantial services for tenants if they are primarily for the tenant's convenience and are not normally provided to maintain the lots in a condition for occupancy. So now you've got this distinction of the services that are going to be provided. Services are substantial if the compensation for the services makes up a material part of the tenant's rental payments. Examples of services that are not normally provided for tenants convenience include supervising and maintaining a recreational hall provided by the park distributing a monthly newsletter to tenants operating a laundry facility and helping tenants buy or sell their trailers. Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include cities, sewage, electrical connections and roadways. So hotels, bordering houses and apartments. So remember if they're a hotel then you would think that that would generally be something on the schedule C but you can imagine kind of gray areas as to whether something be categorized as a hotel or not. So rental income you receive for the use or occupancy of hotels, bordering houses or apartment houses is subject to self-employment tax if you provide services for the occupants. Generally you are considered to provide services for the occupants if the services are primarily for the convenience and are not services normally provided with the rental of rooms for occupancy only. So if you're providing more services than that then you're kind of acting like a hotel is like the general concept here and therefore subject to possibly the self-employment in the schedule C. An example of the service that is not normally provided for the convenience of the occupants is made service. However, provided heat and light, cleaning, stairways and lobbies and collecting trash are services normally provided for the occupants convenience. So we got prepaid rent. So if you got a rental type of situation, you got the prepayment kind of situation where the IRS, remember you can kind of be on a cash basis. You might choose a cash basis or an accrual basis that we talked about before. If you got rent in advance before they actually used the rental property, they gave you the money before they actually were using the place, you would think that on an accrual method, you would then not record it as income when you receive the money but when they use the facilities. But the idea here is that the IRS might want you to record it as income because you already got the cash. So then there could be a deviation from your normal accounting standard to be in alignment with the tax law. So advanced payments received under a lease that does not put any restriction on their use or enjoyment or income in the year you receive them. So that could be a deviation from your accrual accounting. So if you were using accrual accounting not cash accounting and you got prepayments, then normally you'd have to record them as unearned revenue until you actually provided the services, the use of whatever the rental property is. But the IRS might say, hey, if you don't have any restrictions to use in the money, then we want a piece of it. This is generally true no matter what accounting method or period you use. Obviously if you use a cash method, then you would record it in cash anyways because you receive the cash on a cash method. If it was an accrual method, then you could have a difference. So lease bonus. A bonus you receive from a lease for granting a lease is in addition to the rent. Include it in your gross receipts in the year received. Then you got the lease cancellation payment. Report payments you receive from your lease for canceling a lease in your gross receipts in the year received. So we got the payments to third parties. If your lease E makes payments to someone else under an agreement to pay your debts or obligations, include the payment in your gross receipts when the lease makes the payment. So like if they pay someone else as part of instead of paying the payment directly to. So in other words, if the payment, you can imagine the payment going to the landlord, the landlord then paying somebody else. But if they then take the money and they pay the contractor directly, for example, then it would still be payment. You'd think of it similar to like the first scenario. So a common example of this kind of income is a leasee's payment of your property taxes on the leased real property. Settlement payments. A payment you receive in settlement of a leasee's obligation to restore the lease property to its original condition or income in the amount that the payment exceeds the adjusted basis of the leasehold improvements, destroyed damage removed or disconnected by the leasee. Personal property rents. If you are in the business of renting personal property equipment, vehicles, formal wear, for example, include the rental amount you receive in your gross receipts on Schedule C. So that'd be another kind of rental thing. You're renting tuxedos or something like that. That would be the Schedule C business as opposed to a Schedule E. So prepare rent and other payments described in the preceding real estate rents discussed can also be received from renting personal property. If you receive any of these payments include them in your gross receipts as explained in that discussion.