 Income tax 2021, 2022, business income, part number seven. 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, income tax formula, line one, income, which would be supplemented by another schedule, basically an income statement, income and expenses, included in it, expenses basically being deductions of the net then rolling in to line one income of the income tax formula and page one of the 1040, which we see here, schedule C and essence rolling into schedule one, and essence rolling into the page one form 1040, line eight. Here, this is the schedule C profit or loss from the business, basically an income statement. We're still focused on the income line. So items that are not income. So we've spent a lot of time talking about items that are income, and these would be the items that the IRS is gonna specifically list that are not income and note that if it's not income, that's usually good for taxes, incomes good normally in life, but taxes flips everything on their head. So if we don't have to include it in income, that would be a good thing because then we don't have to give the IRS their share of it. So in some cases, the property or money you receive is not income. Let's take a look at those cases, appreciation. So increase in value of your property are not income until you realize the increase through a sale or other taxable disposition. So if you have property and basically the property goes up in value, we don't typically have to record that as income, even though we might say that our net worth has basically increased generally, but rather we wait till we sell the item in order to record the income. So you might see this for example on the depreciable type of property like an equipment and so on that it could actually go up in value or possibly like a real estate, a building or something like that may actually increase in value. We would hope that it would over time, but we wouldn't record that increase in value on the taxes and have to pay taxes on that increase until we actually sold the item, the rationale kind of being that for most things, we don't really know if they've increased in value for sure because the things are unique in the world like a building is unique. You can kind of compare it to other buildings, but it's not really the same thing. It's not in the same location. It's not built exactly the same way, even though they could be quite similar in some cases. So it's really difficult to know. And then of course the market could go up and down based on any other kind of circumstances. So you haven't really locked in the gain until it happens that we have what we call realize the gain when the sale takes place. That's also by the way part of the justification for having a lower capital gains rate than ordinary income rates because you'll recall that we have a progressive tax system, which means that if you have more income in a particular year, then you might be taxed at higher rates than if your income was lower. And you can imagine that if you had like a building, for example, that you've been working in or whatever, it's your office building or something like that. And you held on to it for the last 20 years and it increased in value substantially. And then you sold it, that one sale could result in a whole lot of income in one year when in actuality, the income had really been earned over the last 20 years. But because it's in one year, that's gonna jump you up into a really lot higher tax bracket than if you had spread out the income over the 20 years, which is one of the justifications for like lower capital gains rates rather than having everything in order to income rates. But I digress that you can get into that argument further if you want to. So we got consignments, consignments of merchandise to others to sell for you are not sales. So we might say that we're gonna have, consignments are a little bit confusing because basically the owner of the person that's like owning the inventory or the person that's actually selling the inventory is not basically the owner. So for example, if I was a painter, for example, and I wanted to take my artwork and hang it up in local places like restaurants or something like that on consignment, then the restaurants actually have the inventory, but they don't really own the inventory. It's still the painter, my inventory, and they're gonna facilitate the sale if anybody wants to buy them from their area. So consignment of merchandise to others to sell for you are not sales. So when we put our paintings in the restaurant, it's not a sale taking place, it's a consignment. The title of the merchandise remains with you, the consign or even after the consignee possesses the merchandise. Therefore, if the ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Merchandise you have shipped out on consignment is included in your inventory. So the paintings would be in someone else's place and their restaurant in that case, but they'd still be on my books as the inventory until they sold it at which point we would recognize the sale. Do not include merchandise you receive on consignment in your inventory, include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profits or commission depending upon method of accounting you use. Construction allowances, if you enter into a lease after August 5th, 1997, you can exclude from income the construction allowance you receive in cash or as rent reduction from your landlord if you receive it under both of the following conditions under a short-term lease of retail space for the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Amount you can exclude. So exclusions for income purposes, generally good thing. We want to exclude the income so that we don't have to include it and then don't pay taxes on it. You can exclude the construction allowance to the extent it does not exclude the amount you spent for construction or improvements. Short-term lease, a short-term lease is a lease or other agreement for occupancy or use of retail space for 15 years or less. The following rules apply in determining whether the lease is for 15 years or less take into account options to renew when figuring whether the lease is for 15 years or less but do not take into account any option to renew at fair market value determine at the time of the renewal. So we've got this kind of these nuances with the lease terms. Whenever you dive into lease terms how are they structuring the lease? What's your renewal options can affect basically your options for renewing it so it gets a little bit in the weeds there but two or more successive leases that are part of the same transaction or a series of related transactions. So you can imagine people trying to construct creative lease documents and you have these arguments about the reality of the term versus the structure of the lease substance versus form arguments with regards to its structured in one way but in reality they structured it that way to try to figure a way around something for example. So once again two or more successive leases that are part of the same transaction or a series of related transactions for the same or substantially similar retail space are treated as one lease. So then we have the retail space. Retail space is real property leased, occupied or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public qualified long-term real property qualified long-term real property is non-residential real property basically real estate non-residential not homes that is part of or otherwise present at your retail space and that reverts to the landlord when the lease ends. So obviously again that last part it reverts to the landlord. If it didn't it would basically be a purchase that you would think that's been set up kind of like a lease term. So exchange of like kind property. So generally if you exchange real property so now we're talking real property generally like real estate. Real property used for business or held as an investment solely for other business or investment real property of a like kind no gain or loss is recognized. So you could do a lot more research on the like kind type of exchange but basically if it's a like kind exchange then you could kind of defer possibly part of the gain in that instance. And it used to be by the way something that was a bit more broad. So you'd apply it to other things. So mainly it's being applied to the real property at this point in time. So keep that in mind real property being a little bit more confusing given the fact that there's gonna be multiple factors with regards to like real estate properties with the mortgages and the property itself. So this means that the gain is not taxable and the loss is not deductible for more information you can see form 8824. So basically the kind of idea of it is that if you were going to exchange the property instead of recording it as a sale if you sold the property and then you'd have to recognize a gain and then pay taxes on it and then buy the other property. The general idea would be that you're gonna say, okay well since you're kind of in the same spot because you're buying the same kind of property then we don't wanna force you to recognize a gain at this point in time. We would like to kind of defer that so we don't disincentivize that kind of transaction from taking place by recording taxes on it at the point in time of an exchange kind of situation. So what you would think then, okay well then when I basically sell the property then instead of recognizing the gain I'm just gonna purchase the new property and basically I put the new property on the books instead of at the current market price you put the new property on the books at like the adjusted basis which you would think would be lower because you had been recording possibly depreciation on the other property. So now you've got this lower basis. So you didn't recognize the gain but you'd have this lower basis that would be on the property. Why does that matter? Because when you sell the property that lower basis is gonna cause a greater gain that's gonna be taking place. It'll also lower possibly the amount of depreciation you can take at that point. So basically you're deferring the gain. Now it gets more complicated than that. It gets quite complicated when you get into the situation of the mortgages that are involved and then how exactly are you gonna facilitate the like kind of exchange with the real estate and then you got escrow going into it so it can get quite a complicated specialized kind of area but that's the general idea. So leasehold improvements. If a tenant erects buildings or makes improvements to the property the increase in the value of the property due to the improvements is not income to you. However, if the fact indicate that the improvements are payment of rent to you then the increase would value would be income. So in other words, if your tenant is saying if your tenant's saying I can do whatever I want to the property within these areas and I make improvements to the property and it's on the tenant, the tenant's just doing that because that's what they want to do with their place then that might not be income but if they say hey look I'm gonna make this improvement for you and you're gonna lower the rent for me to do that then it would be income. So loans, money borrowed through a bona fide loan is not income. So obviously if you took out a loan that would be a balance sheet item you would get money but it's not gonna be income in that case it would be a balance sheet item not reported on the schedule C because that's just the income statement but if we imagine balance sheet accounts you'd have a loan payable you would expect which isn't income therefore not on the schedule C not taxable sales tax state and local sales tax imposed on the buyer which you were required to collect and pay over to the state or local government are not income. So if you had to collect the sales tax and then pay it over you might say you might record that two different ways you might say well I'll record it as income and then have a deduction for the sales tax or you might just say it's not my sales tax that I'm paying and therefore I'm not gonna record it as income or have the deduction for the sales tax in that instance.