 Income tax 2021-2022. Software example, figuring net profit or loss. Get ready to get refunds to the max diving into income tax 2021-2022. Lassert tax software, you don't need tax software to follow along but you might want to have the access to the form 1040 which you can find in the IRS website at irs.gov, irs.gov, starting point, single file or Adam Smith living in Beverly Hills 90210. We've got the 100,000 flowing in from the Schedule C. Let's take a look at that flow through on the Schedule C which is the profit or loss from the business. Got the 120 up top. We've got the 20,000 on the expenses for the 100,000 the net then that's rolling in to the Schedule 1. Schedule 1 being the additional income and adjustments to income. That's going to be the 100,000 that rolls in then to the form 1040. Form 1040 of course the tax return and that's online eight to 100,000. We also have the self-employment tax. We got to deal with self-employment tax over here. It's going to be based on the net income. This is going to be called the self-employment tax schedule. It's calculated down below at the 14129 which is going to flow through to Schedule 2. Schedule 2 is going to be the additional taxes. There's the 14129 which flows into the form 1040 page number 2. Scrolling up top there's the 14129. We get half of that as an above the line deduction or deduction for adjusted gross income which we can also see calculated on the Schedule SE. Here it is the 7065 half of the 14129 that's going to the Schedule 1. Schedule 1 being the additional income and adjustments. Page number 2 is where we are at and that's going to be the 7065 adjustments to income that flows into page one of the form 1040 and there's the 7065. We got the 12,550 for the standard deduction. We got the 16,077 for the qualified business income letting the software do that calculation. We got the 64308 on the taxable income. Mirroring that on our tax software income line one coming from the Schedule C income statement basically income minus expenses. There's the 100,000 flowing into the line one. We've got then the taxes down below which is the self-employment tax here calculated on the additions and taxes. Here's our calculation. I won't go into it in depth here but there's the 14130 that's pulling over to the form 1040. We also then have half of that being deduction as the above the line deduction which we're showing here in the adjustments to income. So here's the 7065 half of that self-employment tax pulling in here. There's the adjusted gross income at the 92935 matching what is on our tax return 12,550 for the standard deduction. That looks good. We're pulling over the 16,077 from the software for that calculation and then we've got the 64308 as the net income. So here is the 64308 page two relying on the software to calculate the federal income tax at the 9900. The 14129 was the social security and Medicare the self-employment tax to get us to the 2429. So if I go back over there's the 9900. There's the 14130. There's the 2430 off by a dollar. That's our starting point dollar off being rounding. Okay, so how do we calculate the income and the losses starting point on the schedule? See if we have income usually fairly straightforward. It's just going to be an income statement. We've got the gross income, the income up top 120,000 minus the expenses, the expenses that we've been talking about in depth, which could be multiple categories of expenses. And the net of those would then be the 100,000. So in this case, the 100,000, that's the net income standard income statement in that sense. Now we could be limited then to the losses. Remember if it's income, the IRS is basically okay if we have income generally because they want a piece of it. If on the other hand, there's going to be a loss if this goes below zero, then you might be able to take some of that loss against other income such as W two income. That's when the IRS is going to be a bit more skeptical. So for example, if I was to say, okay, let's say that we had a loss on the schedule C and that would just simply mean that we have 120 of income. Let's say we had 140 of expenses. Now if I go back to the forms, now we've got a loss of the 20,000. So hopefully we can take that loss because of course that's calculated as basically the expenses greater than the income. We would like to be able to take that loss and still be able to roll it in to the schedule one. So here it is rolling into the schedule one as a negative income line item. You can see the loss in brackets here and then rolling into page one of the form 1040. Now note, I don't have any other income at this time. So that loss isn't being able to net against anything else. But if we had other income, for example, W two income, let's put that in place, go into the income line item. And let's say we had W two income of 60,000 and put that in place on the forms. Now instead of paying taxes at the 60,000, I've got this loss and I've got the net at the 40,000. I'm able to take that loss. That's great for taxes. So that would be a obviously a tax benefit. Now note, again, the IRS doesn't like that or skeptical of that of the losses. So they might be skeptical, for example, to determine whether or not this business that we are in is actually a business that's for profit business, or is it a hobby? Now, as long as you can prove that you're in it for profit, then you're good to go. And oftentimes the fact that you have a loss doesn't necessarily mean that you're not in it for profits. You can have a loss and still be in it for profit, especially if it's in the first few years or if you're in a period of expansion. Because many businesses, most businesses, in fact, run losses for a first first couple of years in order to get rolling. And hopefully that's going to pay off by having more revenue in the future or down the road. So that's not really unusual. But you can imagine situations where if it goes over like three years, then the default position for the IRS might be that it's a hobby, you might have to work a little harder to prove that it's a for profit type of business. For example, now, if it were a hobby, then the income wouldn't be reported here. We looked at this a little bit in in the past, but the income would rather than being reported here have to be recorded on the schedule one, the schedule one as basically other income or Yeah, other income. And we would have we would have then activities not engaged in for profit. So it would basically be down here. Now, there's pros and cons of reporting it on a schedule C, or as like hobby income. So if you just got some income, but you're not doing it, you're not engaging in it for profit. If you had no expenses that were applying out to it, meaning if you had $1,000 that you can either put here, or you could put on the schedule C, then you would rather record the income here because it won't be subject to the self employment. As we saw in the schedule C, the schedule C income, if you had income with subject to self employment, because there's no net income or no longer calculating self employment, which is social security and Medicare. If you had your income over here, even though it would be income, you wouldn't be paying social security and Medicare on it. So that would be good. But you can't take any of the of the expenses. And if you were to have a loss, then you don't get to get the benefit of those losses, or at least you can't deduct any more expenses than you had in revenue. And even those if you get a benefit from them, possibly would be on the schedule a itemized deductions, which is kind of restricted in and of itself. So there's kind of the difference between a hobby and basically a business. Now, if we go back to this scenario, and let's say if I go back to the the first page, and we didn't have any, any other income this 60,000, and we just had a loss on the business because we went all in on the business. And if I go back to my forums, I did everything we could to make money, we didn't make money because and that maybe we plan for that because I have enough money to keep us going. As we build up the business, we've got a loss in year one of the 20,000. I don't get any benefit from that. I should you would think kind of I kind of should because I put in money to to the business I you think I'd get some kind of benefit when I make money when it pays off in the future because I'm not getting any tax benefit from that. So you might have the NOL that would carry forward into future periods, possibly being able to benefit in future periods from the loss that you have in this period, that would be basically the general idea. Now note that if you have a loss, then that is a rollover and that would to me make the tax return a bit more complex. And if you had a the same client that you were working in last year and this year, the software will kind of pick that up and help you to pick up those rollovers correctly. However, if for example, you were picking up a 2020 client that that you didn't do their return in 2020 and you were doing their return in 2021, and they had a rollover from the prior year of a loss, you might then want to enter the full 2020 tax return into the 2020 software so that you can then roll it over into 2021. That way you can mirror exactly what the tax return says that has been reported to the government in 2020 and hopefully roll everything over in the same software making the rollover more automated and possibly easier to do. So let's go back to the original scenario and think about what might happen if we had a loss carryover that we couldn't take from the prior year, we might have the 120,000 here, for example, minus the 20,000. There's our 100,000 in the current year. And then possibly if we go to the schedule one, we then on additional income and adjustments have this negative number, you see the statement here for the carryover that we have of the 20,100 minus the 20 is now netting out to that 80,000, which is pulling over to the 1040 on page one. So again, I think that's easier to do if it gets complex on a tax return with carryovers and whatnot from a prior year to actually enter the data into the prior year tax return. Back to the original scenario. So we also note that we saw that there could be limitations for other things that will not allow your loss to go below a certain point. One of those was the business use of the home, for example. So let's say that that was the thing that was taking you below your income below the threshold to negative category, then again, you could be limited. So for example, if I go back on over, and I was to say that now I have my business use of my home, and we're going to say that there's a ratio, let's put the ratio in here for the business use of the home at 600 and 51,500 on the ratio and let's just put in place that we have rent of, let's say 15,000 repairs and maintenance of 2000 utilities of 900 and then go back on over to our forms. So now we have the form 8829 for the business use of the home, which has given us our ratio, we're getting part of these deductions, which are now pulling over at the 7,160 to the schedule C. But notice it's down here and part of the reason it's down here instead of up where the other expenses are, is because there's this limitation to taking it below zero. So for example, if we brought our income now to close to zero on the schedule C, so now I'm going to go to the schedule C and say that my income is close to zero, let's say this was 100 and 121,000. I'm sorry, this is going to say 21,000. So we made $1,000 before that. Going back on over so now we only made $1,000 21 minus 20. And so now you're limited on that on that amount of just the $1,000. So again, you get the same kind of question. Well, is it possible that I then maybe I can take the rest of it because it should have been 7,160 and you limited my deductions were which were in the category of expenses for the business use of the home. It didn't take me into negative amounts. I didn't get the benefit pulling into the page one of a negative number, which would be beneficial to me if I had W2 income. So I'm not I'm not getting that. So then you've got the question there again, could I possibly roll that forward into a future period? So that gets a little bit more confusing if we go back into the original scenario, back to us having income of 100 and 100,000. And then I look at this form, which is the business expenses for the business use of the home. And now I've got my same calculations in here for the current year that came out to that 7,160. And then we've got line 25, which is the carryover of prior year expenses, which I put 5,000 in. So you can see how that can be those carryovers can be a little bit confusing as well. And the distinct or you might have to treat them differently than the you know, that ain't well because of that kind of limitation to take you into the losses. So again, it can be quite useful. And these instances, anytime you have a carryover that's going to be involved to enter the transaction into the prior year, if it's a new client, so that the software can help you with the carryovers, and then you can kind of deconstruct what the software is doing. So you can make sure that the software is doing what you would expect it to do, that it's doing the proper thing, and so that you can explain what is happening to the client.