 Most of this information comes from the tax guide for small business for individuals who use Schedule C, Publication 334 Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one income. Remember, in the first half of the income tax formula is in essence an income statement, but just an outline of scaffolding other forms and schedules flowing into it. The Schedule C for business income, basically an income statement in and of itself having income minus business expenses. The net income then flowing from the Schedule C to line one income of our income tax formula. This is the first page of the Form 1040, noting that the Schedule C would flow into the Schedule 1, which would flow into line eight of the Form 1040 here. This is the Schedule C profit or loss from business where we can see the income statement format of an income and expenses. Alright, so now we're going to be talking about accounting for your income. Accounting for your income for income tax purposes differs at times from accounting for financial purposes. So note, when we think about the bookkeeping, the general accounting process, what we're trying to do is compile past financial transactions. Financial transaction benefits you today. In such a way that it makes sense for whatever purpose we're using it for, generally that being decision making purposes for us as managers and possibly providing it to external users, investors possibly, to make investment decisions. But here we're compiling basically that same financial information. Balance sheet income statement primarily focused on the income statement here, because it's an income tax in order to do the taxes. So that means that when we think about the accounting methods that we're using, we usually think of an accrual method versus a cached method. And we often think from a bookkeeping standpoint about regulations on businesses that are usually regulating forcing businesses that are large corporations to use most of the time and accrual based method and using generally accepted accounting standards. But small businesses often aren't regulated even in their financial reporting because they're not publicly traded companies. So they're going to use whatever method is best for their internal use and then they basically have to do their taxes and the taxes are going to be regulated by the tax code. So now we've got to make sure that we're in compliance. We might have to make some tweaks between what we do on a bookkeeping standpoint to what is done basically on a tax code standpoint. Many small businesses might then just say, hey, I'm just going to do my books on a cash basis, because that way you don't have the adjusting entries to kind of move from a book basis to a cached basis or a tax basis, I should say, because you're primarily doing the books in order to comply with the tax code. Now note that the tax code is not the primary or best way to account for things because the tax code has all kind of rules that aren't designed for optimizing decision-making from a business standpoint. For example, the capitalization rules and the 179 depreciation, early depreciation, special depreciation, those are really distorting the concepts of normal accounting. But if you're a small business, you might say, well, I'd rather just be on a tax-based method and do as little kind of adjusting entries that I need to do at the end of the year in order to get the taxes done. So those are decisions that you might want to talk to your accountant about to think about how your bookkeeping would best be done so that your taxes can be as easy as possible and you can also take care of your internal needs for the financial statements and possibly any external needs for those financial statements perhaps for needing to get like a loan or something. Okay, so this section discusses some of the more common differences that may affect business transactions. So figure your business income on the basis of tax year and account and according to your regular method of accounting, which we talked about before, cash method or an accrual method or some kind of modification or combination of those methods. So if the sale of a product is an income producing factor in your business, you usually have to use inventories to clearly show your income. We talked about businesses that have inventory. If you deal with inventory, you're probably having to lean towards an accrual method to some degree because of that inventory. So make sure you're taking that into consideration. How are you going to account for the inventory? So dealers in real estate are not allowed to use inventories. For more information on inventories, you can see chapter 2. Income paid to third party. So all income you earn is taxable to you. You cannot avoid tax by having the income paid to a third party. So we talked about, I believe a little bit of that before when we thought about revenue recognition concepts. So you might say revenue is recognized when I receive the income. But what if I have that revenue collected by somebody else? Well, they're collecting it on your behalf. There's nothing really stopping you from collecting it. So you would think that would still be basically income to you. So example, you rent out your property and the rental agreement directs the leasee to pay the rent to your son. So now I didn't get the income. It went to my son. Well, okay, you know, that's clearly some trying to avoid something here. So the amount paid to your son is gross income to you.