 Income tax 2022-2023. Dispositions of business property tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example form 1040 populated with lesser 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. Starting point we got the single-filer Mr. Anderson not with the W2 income but having a business that's flowing from the Schedule C to line number eight. Let's look at that flow through. Schedule C on the left. Profiter loss from the business is an essence and income statement. Income minus the expenses the net income flowing into Schedule 1. There it is line three totaling up at the bottom pulling into page one of the form 1040 right there on line number eight. We also know that the Schedule C is going to have self-employment tax so Schedule C net income bottom line being used to calculate the Schedule SE self-employment tax which is calculated at the 14.129 flowing into the Schedule 2. There's the 14.129 here which is flowing into the 1040 page 2 with the tax not the income tax here but the self-employment tax social security and Medicare. We then know that half of that amount going back to the Schedule C we've got the net income being used to calculate the self-employment tax on Schedule SE. Half of that is going to be deductible as and above the line deductions. We took half of that 14.129.7065 deductible on Schedule 1 page 2 with 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 then 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 which is going to be adjustments to income. There's the 7065 flowing into the form 1040 and we see it here on line 10 bringing us down to the adjusted gross income of the 92935 standard deduction which is a standard amount for the standard deduction whether business or not and then we've got the qualified business income deduction we're reliant on the software to calculate that for now and that gives us then the taxable income 63988 we're mirroring that over on our worksheet over here 100,000 pulling in from the Schedule C adjusted gross adjustments to income gives us the AGI standard deduction business qualified business income deduction gets us to the 63989 we're a dollar off that's okay page two calculating the income tax 9692 plus the self employment tax gets us to the total tax 23821 we're going to imagine that we made payments of 30,000 bottom line 6179 okay so now let's imagine that we go to the Schedule C over here and we're going to go into an example of disposing of business property now note that when you look at the normal income statement down here as you're making purchases or doing business if it's an expense then of course we're just going to record an outflow of cash for example as an expense like advertising like you know possibly insurance or you know the phone bill utilities and so on are going to be down here but if we purchase something that's a piece of equipment we then may have to capitalize the equipment and record depreciation so let's first look at that and then we will say well what if we dispose of some of that equipment then we might have a gain or loss on the disposition and that's where our main focus is now so let's just put a piece of equipment on the book so we can see how that kind of works we're going to say this is going to be depreciation and let's just call it equipment I'm just going to say equipment number one just a generic equipment form it's going to go to the form schedule C the category let's say it's going to be furniture and let's say it's machinery I put machinery and equipment the date placed in service let's do this one for this year 03 22 23 let's I'm sorry let's say 06 15 let's do it do it 02 15 22 in the current year we're the tax year we're working on the cost or basis let's say it was 50,000 let's say and we're going to say the method that's going to be used will be let's do five years makers we might get into the useful lives later which would be categorized by the piece of equipment but right now I'm just going to do this for an example so we can look at the disposition of an equipment so I'm going to say this is going to be makers five years is that what I picked five years that's the auto limits I just want to say makers five years office equipment let's do that without the auto limits and then when we calculate that out it's going to be pulling over here now notice it's going to be take it took some special depreciation that's why it's still pulled the full 50,000 here but we didn't pull it in by just putting it on the the schedule C as just basically an expense right off the bat but instead still had to capitalize it and use the depreciation rules which still may allow us to depreciate it all in one year so in other words if I go back to this depreciation schedule here and I look at the regular view this is our depreciation I know it's a little small but you've got the date acquired the the cost or basis and then it took the special depreciation allowance of the 50,000 which is why it's still basically giving us the whole thing as if we just expensed it in the current year but you get the idea that we have to put it on the books as an asset and then apply whatever depreciation rules we have when the government's trying to stimulate the economy one one way they do that is try to incentivize purchases of say equipment by allowing you in essence to depreciate it all in the current year okay so now let's imagine we put something on the books for the prior year that would still be depreciating in the in the current year so I'm going to go back on over and let's imagine that I have another piece of equipment so I'm just going to call this equipment to equip let's say equipment number two as a generic insert I'm going to say the category I'm going to say this happened on 0101 let's say 2 0 let's say it's for 25,000 same method we'll get into depreciation methods later just note however if you're taking out a new client that has a depreciation schedule I would recommend first you want to make sure you get the depreciation schedules which sometimes could be difficult because sometimes they're not attached to the returns so you got to make sure you have those and then I would recommend entering the data into the prior year software so we can recalculate the depreciation for the prior year to match the current tax return to make sure you have everything lined up and then roll it over into the current year but in any case we'll get into depreciation methods more in the future right now I just want to show something that has depreciation on the books already so when we dispose it it'll have something on there so prior year depreciation I'm just making up the 10,000 so that means if I go back out over I adjusted this first one by the way to eliminate the current and special depreciation so you can see that 50,000 is now basically it's a double declining half year convention that's what the makers thing is so we might talk more about that later but that's now it's calculating the 10,000 and then for the second piece we've got the 10,000 prior year depreciation and then it's using the makers double decline half year convention to get to the 4,008 that 14,008 is what's pulling over to the schedule c so that's the general idea again if you purchase equipment you might have to put it on the books and capitalize it you might get all the depreciation still in the first year of purchase if you can qualify for like 179 deduction and special deductions but conceptually it's likely that we can from an accrual standpoint an accounting standpoint we put on the books and allocate the cost over into the future and and the tax code kind of mirrors that and then they deviate from that based on whatever economic weird whatever they're doing at the time so now we have this one on the books now we can say okay what if we sold that piece of equipment so now we're going to say we disposed of that equipment that has depreciation related to it this is not inventory if it was inventory then we would normally just purchase it mark it up and then sell it and and that would be part of our cost of goods sold calculation but instead this is equipment that we used in the business like a forklift or something like that which we're now selling or disposing of also note from a bookkeeping standpoint between the bookkeeper and the tax and taxes the equipment is something that you don't purchase all the time it's not a day-to-day business transaction so what you need to do is give that information that changes from period to period the purchases and the disposals and and sales of equipment which there shouldn't be too many that's what you need to give to your tax professional so they can update the depreciation and amortization schedules you also might be in a situation if you help your clients with bookkeeping and you're in your like a tax professional or something and you do bookkeeping as well that they might need help with those transactions of course because they can be complex just from a bookkeeping standpoint and then when you take tax depreciation into consideration it becomes further complicated also note that we could have different depreciation schedules for book depreciation and tax depreciation so I could have put like book depreciation in there on a straight line method instead of a instead of a a tax method which could include taxes could include 179 and and special depreciation so that complicates things further and so again you got to just we might talk more about that when we get into like depreciation itself but let's think about a disposal now we're going to sell the asset now when we sell the asset notice that you would you you might sell it obviously you're going to sell it on the market for whatever you can purchase it for and the asset value has gone down in other words what you've done with this asset we're selling let's say this this one right here we bought it for 25 000 it's going to go down in value that's the original cost and basis of it it's going to go down in value but we're getting a benefit from it as we depreciate it so we got a tax benefit of the 10 000 and that decreases the basis we got another tax benefit if we were able to take the 4800 in the current year that decreases the basis as the basis goes down that's bad for taxes because it's more likely that you're going to end up with a gain or less of a loss when you sell it now note that the special depreciation and the 179s allowing you to expense more of it in the current year means that when you sell something it's likely that you're going to end up with a gain because you over depreciated it because the tax code allows you to do that right so now you might end up with a gain kind of situation all right so let's imagine that we sold it for like a gain situation let's say we sold it for uh for 15 000 we sold it for 15 000 percentage uh percentage or amount of basis property code existing mortgage let's say and i'm gonna say we sold it like in the middle of the current year of 2022 in this case so so now it's it possibly adjusts the depreciation so now we've got the 25 000 the 10 000 that we depreciated in a prior year it's still depreciated part of it because we had the equipment up until the current year and then it calculated the sale you know at that point in time so then we can go to the to the forms that were generated so here's form 4797 sale of business property so if i scroll down the sale of business property pulling in gain from line 31 if i go to page two then we've got the equipment sale and here's the calculation so we had the 15 000 that's what we received the cost or basis plus expense expense of the sale is 25 000 the depreciation allowed or allowable 12 400 so the adjusted basis then is the 12 600 so the total gain comes out to that 2400 that they're picking up here let me just see if i can kind of mirror that in like an excel worksheet let's just pull up another excel worksheet and just see if i can reconstruct that because sometimes it makes more sense if we build it ourselves so i'm just gonna say let's format this currency and i'm gonna say we'll get rid of the dollar signs boom and so when we bought this thing we bought it at a cost of 25 000 and then there was depreciation so we had the depreciation for you let's say depreciation for year one and then year two and we sold it in year two and so the depreciation for year one or the prior year depreciation let's say prior prior year depreciation was 10 000 and the current depreciation we could see here was 2400 so we'll say okay it's 2400 so the total depreciation total depreciation was equal to the sum of those two of 12 400 so we already got a benefit from that because we got to deduct that on the schedule c right so we got a benefit from that that means the basis and the lower the basis is so now the basis we could say is going to be and just would be like the book value if you're talking in terms of accounting terms basis for taxes is now that 12600 so when we sell it when we sell it we're going to sell it we sold for 15 000 and now our adjusted basis adjusted basis i should probably call it adjusted ad basis is now that 12600 so that means that the gain or loss in this case a gain is going to be equal to the 15 minus the 12600 and that's where we're going to get that 2400 right so that's where they're getting this on this page this 2400 so now that's a gain note that it's not pulling into the schedule c here so the gains and losses aren't being pulled in to like the net income but instead it's being pulled into the other income on schedule one so line four other gains or losses from form 47 97 there's that 2400 plus what's on the schedule c 87 6 that's what's coming down to that 90 000 go into the to the 1040 and then it flows into the 1040 here now note that this game when i go to the second page and i look at my tax calculation in my software i don't see another kind of schedule which often kind of pops up when we have multiple kind of uh tax tables that we need to calculate on such as if there was a different capital gains rate than the ordinary income rate and so on and so notice if you look at this situation this is where things get messy when they start changing and having different tax rates because like if i bought this property for 25 000 note that i got a benefit of 12400 of ordinary income in prior years tax benefit tax benefit related to ordinary income not capital gains right and that brought my basis down to the 12600 now when i sold it for 15 000 then i sold it for an amount greater than the basis but not a not not an amount greater than the cost which is likely to happen for equipment because equipment goes down in value over time so it's not likely that you're going to sell the piece of equipment for greater than the cost that might happen when you buy real estate but for equipment you know that that's usually not the case but it's quite likely that you sell it for something greater than the adjusted basis because of the accelerated depreciation schedules being used particularly because of like 179 and special depreciation so that means that this 2400 gain really is a result of me of me over depreciating and we over depreciate because we're not even trying to get the depreciation to be correct from an accrual standpoint we're just following the tax code which often accelerates the depreciation so it's likely that we're gonna we're gonna end up a gain with a gain there but then the question is should that gain just conceptually be ordinary income or capital gain in nature and you could think well it's it's it's if i got these deductions here for an amount that were ordinary income deductions you would think that the gain would have to be ordinary income too because i shouldn't get a capital gain special favorable tax treatment but if the amount was greater than 25 000 that i sold it for the cost of it not likely to happen for equipment but quite possible to happen for real estate then you have a situation where it's like well now you would think the amount that i sold over the amount that i bought it for might be something that i should be calculating as capital gains right so so if i so if i plug this just let's just see what the software does and say well what if i sold this it's not likely to happen for equipment but what if i sold this thing for like 30 000 which is 5000 over my original cost price so now i've got a 30 000 and things get a little bit more messy over here so i go back on and i say now my depreciation schedule looks you know pretty much the same for the depreciation but now my 4 7 9 7 i sold it for 30 000 the cost was 25 000 the depreciation 12 000 4 adjusted basis 12 000 6 and so the total gain is 17 4 so if i match that over here i'm gonna say if i sold it for 30 000 17 4 so that makes sense and then we're gonna say if i go to the summary down here it says total gains of all property 17 4 add property columns a through d the 12 000 4 and this gain this is the 5000 the 5000 which is in essence the gain over the original price right so that 5000 now you could see now is populating we didn't have before a schedule d to schedule d so it's being populated in schedule d and this is the schedule most most known for for individual filers when we still sell like stocks and bonds for example and now we've got the 5000 that's pulling in from the 4 7 9 7 and that means it's likely to be treated in more favorable capital gains rates so if i go to to then the schedule we still have on schedule one the 87 600 the 12 000 4 adding up to the total 100 000 now but which is interesting because that's where we started with but that's i didn't mean to do that but if we go then over here that pulls over but we also then have the uh capital gain so the capital gain so we're being it's being broken out the total gains being broken out here we've got the 12 000 4 which the total gain was 17 4 so that we've got the 12 000 4 and the 5000 which is adding up to that 17 4 so the amount that's going to be subject to like the ordinary income 12 000 4 and then on schedule 10 40 we've got the 12 000 4 is included here and then the 5000 is coming in from the schedule d so now that we have something on the schedule d that would indicate that it's going to be subject to capital gains rates which we can see if i go to page two and i could i could see now i've got this little worksheet which is basically indicating now we can't just just apply one tax progressive tax system but that 5000 that was broken out for the schedule d like we talked about before when populating schedule d for like the sale of stocks now has this this 5000 that we got a tax or get to tax it's a favorable thing at a favorable tax rate so again that's likely to happen like in a real estate type of situation now you could then have a you could have a loss situation so i could go over here and say let's say we sold it for something under the adjusted basis or you possibly just disposed of it right so let's say we sold it for like 2000 which is sold it for 2000 so now if i go back on over to my depreciation schedule it should look much the same here and now schedule d is gone right and then i'm going to go to the 47 97 and so here's the calculation up top we got the sales price the depreciation at the 12 000 4 we've got a loss of 10 600 so if i mirror that in my worksheet i could say okay the cost was 25 000 same basis 12 000 6 but now we sold it for uh 2000 so so now we've got this loss of the 10 000 6 is that what they said over here 10 000 6 all right so there's the loss and then that pulls into the schedule one so now losses could be good right so so now you've got a loss and i've got the 87 uh 6 minus the 10 000 6 is going to give us our loss 77 that's pulling over to the to the form 10 40 and so now we've got our 77 000 pulling to the 10 40 notice there's no schedule d calculation and page two isn't giving me another worksheet which is indicating there that we're basically getting the loss at like ordinary income kind of uh rates which is good for a loss because uh that will typically be a favorable situation for the loss which kind of would be what you would kind of think would make sense because you bought the property not to hold on and sell out again you bought it for use and in business purposes for business purposes so so another common thing to happen for business property is that they just dispose of the business property so you might need to go through your your worksheet here and just look at your equipment and see if you no longer have the equipment from time to from period to period because each year you're gonna buy more equipment sometimes and sometimes you dispose of the equipment and if the equipment is fully depreciated you're not getting any more tax benefit from it but it might still kind of be on the books just kind of hanging out there and you might be able to clean out the books and and try to tie in your actual equipment to what you have on hand note also that when you're doing these depreciation schedules when you buy the equipment it's it you you can put the equipment on there like one lump sum instead of trying to break out the equipment and you can use a generic name as i did here of equipment but you don't want to do that because at the point of time that you sell the equipment once once your business grows and you've got a bunch of equipment on the books at some point you might sell the equipment and if i was to sell like one like let's say you know forklift or whatever and this number 50 000 represents three forklifts that i grouped together as just equipment then it's going to be difficult for me to determine which thing that i actually sold and and then if i know that it was one of three that i grouped in this lump sum number i'm going to have to do some finagling to try to indicate the fact that i sold one third of that 50 000 so you see it becomes messy going forward so you'd like to take your depreciation schedule and say everything on this depreciation schedule can i tie that out to a physical thing in my business if not you might want to go through your depreciation schedule and make it more specific to so that you can so that you know what you're talking about so that when you dispose of things in the future you can properly dispose of them on the depreciation schedules and on the tax return so also just realize that when i when we dispose of these items if you had a difference between tax depreciation and book depreciation which the software can calculate then so notice they're the same right now but maybe later i'll show you that we could we could adjust the the book depreciation to like a straight line for example and for the tax depreciation use whatever the tax code wants uh small businesses will often keep their books on tax depreciation even though that's not the best accrual accounting format because it's easier than having two sets of depreciation schedules but if you want more accuracy from an accounting standpoint then the tax code is not good for their depreciation schedules because it completely alters it with the special depreciation and prior depreciation and the and the you know the double declining isn't bad but that other stuff makes it all wacky so so that's the pros and cons there so it's possible as a as an accountant and the tax preparer to have book depreciation on straight line tax depreciation on the whatever the tax code is makers or whatever they are are able to use and allow you to use and what you choose to use within the framework provided