 Income tax 2021-2022, business income part number eight. Get ready to get refunds to the max. Dive in to income tax 2021-2022. Most of this information can be found in Publication 3-3-4 Tax Guide for Small Business Tax Year 2021 income tax formula looking at line one income, which would be supplemented by another scheduled basically an income statement. Income and expenses included, basically being deductions to net then rolling in to line one income of the income tax formula and page one of the form 1040. We see here on the tax return with the tax return, we would have the schedule C, the schedule C then rolling into the schedule one, the schedule one then rolling into the first page of the form 1040 line number eight, which would be the other income. We've got the schedule C here, basically an income statement. We're still focused on the income lines. So we have the accounting for income. Accounting for your income for income tax purposes differs at times from accounting for financial purposes. So this can be a little bit confusing because remember we talked about the methods of accounting, which could be most people think of as an accrual basis method, cash basis method, but oftentimes we might have some kind of hybrid between the two methods. And no matter what method we choose, we might have some other kind of rules that we have to take into consideration with regards to the tax code, as compared to with regards to our business taxes. So if you were to basically list this stuff out, when it gets more complex, what is nice to do is to take your financial information from your bookkeeping system and then kind of log in your adjusting entries for taxes. So you can kind of see exactly what those differences are where the tax code deviates from the bookkeeping. If you were looking at like publicly traded companies, they often in the United States put their books together in accordance with what we call generally accepted accounting principles which are basically best practice accrual principles in general. And when we look at the tax code, we're obviously putting this together in accordance with the tax code, which might mirror to some extent the accrual accounting principles or cash accounting principles, but then could of course deviate from some of those things and we have to account for those differences. So this section discussing some of the more common differences that may affect business transactions. So figure your business income on the basis of a tax year and according to your regular method of accounting. So the regular method of accounting, whether we use an accrual or cash or some hybrid is what we want to be using in general for the tax code, but still may have deviations from that method for tax law versus our accounting method. If the sale of product is an income producing factor in your business, you usually have to use the inventories to clearly show your income, details in real estate are not allowed. So I'm sorry, dealers in real estate are not allowed to use inventories. So for more information on inventories, you can see a chapter two. So if you have inventory, that's usually on a cruel kind of thing because normally we have to put it on the books as an asset instead of expensing it at the point in time that we purchase it. That's normal accounting for accrual accounting and you're kind of forced to do accrual accounting usually if you have a significant amount of inventory. Income paid to third party, all income you earn is taxable to you. You cannot avoid tax by having the income paid to a third party. So if you had income that is gonna be due to you, you've constructively basically received it even if you have the income paid to someone else basically on your behalf because of course, if you can get that income at any time, then you have in essence constructively received it. So an example, you rent out your property and the rental agreement directs the leases to pay the rent to your son. So it's like, yeah, it's not my income, they're paying it to my son. So instead of me getting the money and then giving it to my son, for example. So the amount paid to your son is gross income to you because it's your property. And obviously when you give it to your son anytime there's just like related party transaction, that's another sign that something funny might be going on or it's another area where the IRS is gonna be skeptical because that's when you don't have market transactions happening the way you think market transactions would if you had non-related individuals. So cash discounts, these are amounts to seller permits you to deduct from the invoice price for prompt payment for income tax purposes, you can use either of the following two methods to account for cash discounts. So basically, if you're getting a cash discount and you're paying for something, then normally the cash discounts usually a fairly small kind of item where the people, they're charging a discount because they wanna get paid sooner, they're trying to increase their cash flow. So if you pay them in a shorter amount of time then you get the lower price. So one, deduct the cash discount from purchases so you could see line 36 purchases less cost of items withdrawn for personal use in chapter six. We'll talk about that later cost of goods sold calculation two, to create the cash discount to a discount income account. So now when you get the discount you could put it directly into basically the income account which could make it a little bit easier depending on how you're calculating the inventory items that you're purchasing because when you purchase the inventory it gets a little confusing. When you put the inventory on the books at the point in time of the purchase and then if you pay within the discount period and you get the discount then do you make the adjustment basically to the inventory item or possibly can you put the discount somewhere else possibly recording it as income? So you must use the chosen method every year for all your purchase discounts. So once you choose a method then that consistency thing is something that the tax code is going to want generally in counting in general wants consistency. If you use the second method the credit balance in the account at the end of your tax year is business income under this method you do not reduce the cost of goods sold by the cash discount you received. When valuing your closing inventory you cannot reduce the invoice price of merchandise on hand at the cost of the tax year by the average or estimated discount received on the merchandise. Then we have trade discounts. These are reductions from a list or catalog prices and are usually not written into the invoice or charged to the customer. Do not enter these discounts on your books of account instead use only the net amount as the cost of the merchandise purchased. So for more information on, you could see the trade discounts you could take a look at chapter six of this publication there. Payment placed in escrow. If the buyer of your property places part or all of the purchase price in escrow because that's gonna be facilitating or holding until the completion of the process has been done. You do not include any part in it. You do not include any part of it in gross sales until you actually or constructively receive it. However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income even if you do not accept the money until the next year. So you've got this escrow thing where basically you don't really have constructive receipt of it possibly at that point in time, but when you do have constructive receipt of it, then you have to claim it as income. And so again, this is another area where you can imagine people trying to use this kind of tool where they have constructive receipt, but they're trying to just delay it over the cutoff date so they don't have to record the income in the current year, which is what the IRS is gonna be concerned about and trying to stop from happening. Sales returns and allowances credits you, credits you allow customers for return merchandise and any other allowances you make on sales are deductions from gross sales and figuring net sales. So you've got the returns that are going to happen. So obviously if you have the return, they've returned the merchandise, then you have a sale that kind of didn't really happen. So right, you got to reverse the sale that they basically happened. So you might have sales deduction, which could be like a contra asset account or a contra income account reducing the sales item. Let's read it one more time. Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales and figuring net sales. So on a bookkeeping standpoint, you might see it as like a contra sales item which acts kind of like an expense, but it's really kind of reversing a sales, sales returns and allowances, for example, advanced payments. So special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter two. So if you're on an accrual method of accounting and someone gives you an advanced payment, meaning they give you the payment before you actually do the work, then you wouldn't normally record that in income even though you got the money because you haven't done the work and that would be in unearned revenue. But the IRS might make an exception here because if you have the money and you can constructively use it and there's no obstacle to it, then the IRS wants their share so they deviate from an accrual method in that case. The advanced payments is not something you see in every industry because usually you get paid after you do the work or at the same time you do the work, but many industries you get paid in advance, for example, any kind of application service, for example, where it's a subscription model, you might get paid basically in advance before you do the work giving the subscription, the access to whatever you're giving like software or magazines or newspapers. So insurance proceeds. If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. You cannot deduct the reimbursement part of a casualty or theft loss for more information on that. You can see publication 547.