 Income tax 2021-2022. Figuring net profit or loss. 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 on the IRS website irs.gov, irs.gov. Income tax formula, line one income. We would have a separate schedule, basically an income statement having income and expenses on it. The net then is what rolls in to line one income of the income tax formula as well as page one of the tax return form 1040 that we see here on line eight. We would have the schedule C in essence the income statement rolling into schedule one schedule one rolling into page one of the form 1040 line eight that we see here. This is the schedule C in essence the profit or loss from the business. The bottom line of this is in essence the net income from the schedule C. We can imagine it either being positive income or negative possibly having a loss. What then can we do with that loss? Can we take that loss possibly against other income possibly income that was generated say from W2 income? For example, that would be one of the questions. Note that the IRS likes us having income because they want to get a piece of it. They're skeptical of having a losses because they want to have all the upside but not the downside. They are our silent partners. When we have income, they want their cut. When we have a loss then they might not want to be pitching in on that. That's why we might have restrictions in terms of whether or not we can take the loss or the benefits for them. So you always want to keep that mindset in mind when you get involved with the loss side of things. So figuring net profit or loss after figuring your business income or expenses you are ready to figure the net profit or loss from the business. In essence the bottom line of the income statement income minus expenses. Expenses basically being deduction if the income is greater than the expenses or deductions on the business side of things typically reported in essence on the schedule. See you have income if the expenses or deductions are greater than the revenue than in essence you have a loss. So you do this by subtracting business expenses from business income. If your expenses are less than your income the difference is net profit and becomes part of your income online three of schedule one form 1040. It would then go from the schedule one to page one of the form 1040. If your expenses are more than your income the difference is a net loss. You can usually deduct it from gross income online three of schedule one form 1040. So once again now you would have a loss that would go into schedule one schedule one typically reporting income items. But now you've got that loss that's rolling into there and then that would hopefully roll in to page one of the form 1040 as basically a negative number. So it would act kind of like a deduction but it would be in the kind of income area on the form 1040 which would be a good thing because that then might be able to be taken against other types of income. Such as possibly if you had W2 income or other sources of income which is good for taxes losses are good for taxes. They're not good in real life. You shouldn't be shooting for losses. You don't want losses but on the tax return losses can be good. So but in some situations your loss is limited. So remember the iris is going to want to limit those losses. This chapter briefly explains three of those situations. Other situations that may limit your loss are explained in the instructions for schedule C line G and line 32. If you have more than one business you must figure your net profit or loss for each business on a separate schedule C. So you might have a situation that would be a bit more complex where you've got multiple types of businesses multiple than schedule C's and you would have to be applying these rules out then to each of them on a separate basis. So excess business loss limitation. You've got too many losses or what's the limitation on the loss that we have. So your loss from a trader business may be limited. Use form 461 to determine the amount of your excess business loss. If any your excess business loss will be included as income on line eight of schedule one form 1040 and treated as a net operating loss that you must carry forward and deduct in a subsequent year. So if you have that net operating loss then you might be able to carry it forward. Now notice that the tax law has changed like with a carry back capacity and a carry forward capacity. At this point you typically have the carry forward capacity which from a tax standpoint is actually a bit easier because when you have that idea of carrying something back like a loss back then that causes problems because then you have to basically make amendments or do something to the prior year tax return. So it's actually a little bit easier to carry it forward. Now this could be a good thing as well because note that if you can't get a benefit from the loss in the current year then the question is well do I just lose the loss altogether or do I get a benefit going forward. So you would think hopefully you would get some loss going forward and this is the typical kind of reasoning or rationale with the tax code. So if they limit something they might give you a benefit going forward. Now here we might have a limitation because for example we don't have the any benefit that we can get. We can't take it against any other income for example so we're not getting any more benefit from it. So then you would think maybe when I get income in the future I should be able to take it. Why does that make sense from a legal standpoint? It kind of does because especially in the first three years when you put money into a new business it's likely that you're going to have losses for multiple years. That's kind of common and it would be nice that you would think that you would get a tax benefit from it because those few years of losses are what is contributing that risk as well as what's being contributing to generate revenue in the future. So if you're not getting any tax benefit on the initial investment you would think you'd get the tax benefit when the investment starts to pay off and you have actual income in future years that you could basically net that initial few years of losses that you put into place. So that would be one rationale. If other limitations happen like they call it passive activity losses or something like that you have a similar kind of thing. That would be restricted in that case to matching up your loss compared to a certain type of profit. So the same idea would be placed. Well if I can't take the loss now can I roll it forward or possibly backwards but possibly forwards at this point in time and take it when I have that similar kind of income to match it out against. Also just realize that when you have this kind of rolling forward type of thing it's very nice to be able to use the same software from year to year so the software will help you to determine these rollovers and they can get kind of complex when other kind of tax regulations go into place. If you have a new client that has rollovers or a more complex return which I would say a schedule C in general might be more complex just in general or they have a schedule A itemized deductions you might want to enter the prior year return. So for example if in 2021 you had a current client that had a more complex return with possibly a schedule C, possibly NOL rollovers possibly a schedule A or whatever then you might want to enter that into the prior year, 2020 mirroring what they did in the prior year then use the software to help you with the rollover into the current years just from a logistical standpoint that might be useful. So for more information about these excess business loss limitations you can see form 461 and its instructions. So a casualty or theft resulting from a federally declared disaster moving expenses and rental property. A loss from operating a business is the most common reason for an NOL. So clearly a business having a loss or operating at a loss is one of the most common reasons for an NOL or net operating loss that you might then be able to benefit by taking against somewhere else also just realize that if you have a loss then you're getting a big tax benefit and you also want to we talked about earlier the differentiation between a hobby and a business so the fact that you're losing money does not mean that you are a hobby because it still might be a business purpose but you just you're just not making money yet hopefully you're going to make money into the future but realize the government if they were to audit you might ask that question it's more likely if they ask that question if you have something that you're doing that's kind of fun so the classic example where people used to like to breed horses so there was cases that people had horse racing and horse breeding where they were spending a lot of money but they weren't actually and they were making some money but they had massive losses on them and they might the government might say well that looks more like a hobby to me than a business so if you're doing something that's kind of fun then I'm not I don't know much about breeding horses or anything or how fun that would be it's not but it seems like it could be kind of fun but in any case then you might have a little bit more difficulty or justifying that it's a business or not but you can if you're doing it for profit also realize that if you have three or more years of losses in a row then the shift might go from the IRS to you to kind of prove that you are on a business as opposed to a hobby if it's a hobby then you don't have the same kind of losses deductibility that you would have you're going to be limited and we talked about that in prior presentation so I won't go into too much more detail here for more details about NOLs, Net Operating Losses you can see publication 536 it explains how to figure an NOL when to use it, how to claim an NOL deduction and how to figure an NOL carry forward so you can take a look at publication 536 to dive deeper into that on the IRS website at IRS.gov not for profit activities if you do not carry on your business to make a profit there is a limit on the deductions that you can take you cannot use a loss from the activity to offset other income so again if it's a hobby then you can't use the losses to deduct against other income because it's going to be reported the income will be reported basically as other income not on the schedule C the deductions if you get any might be limited then to the amount of income that you would have so activities you do as a hobby are mainly for sport or recreation come under this limit for details about not for profit activities you can see chapter one of publication 535 so if you're worried that the IRS might determine that the thing that you're reporting as possibly a business and possibly have losses on it maybe they're going to say it's a hobby then you want to be able to get ready if you had to justify it for an audit look at publication 535 in that case that chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct