 Income tax 2022-2023, business owned and operated by a spouse's tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated using LASERT 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're going to start with the single filer and then move on to married and then think about how we might have a married situation where both are participating or owners of the business. So single filer Mr. Anderson, we don't have any W2 income, but rather Schedule C income flowing through to the Form 1040 line 8. Note that that's coming from the Schedule C. Let's jump to the Schedule C to see that. This is our business income, profit or loss from business. This is in essence an income statement, 120,000 income minus the 20,000 of the expenses. Business deductions gets us to that net income in essence of 100,000. That rolls into the Schedule 1, other income and adjustments on line 3. That totals up at the bottom of Schedule 1, flows into the 1040 as we saw with the 100,000 here on line 8. We also know that there's going to be self-employment tax, which 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 than 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 a key component with our current topic of thinking about a business owned by spouses, a married couple. So let's look at that. The Schedule C totals up down below at the 100,000. That then is going to be used to calculate the self-employment tax, not this one. Here it is. And so that's going to be taken the 100,000 calculate the self-employment tax, which is in essence the employee employee or portion like equivalent to payroll taxes, social security and Medicare. That's at the 14,129, which is flowing into the 1040 page to not just the income tax, but now this social security and Medicare, the self-employment tax in other words. So then we know that we're going to have half of that tax is going to be deductible on page one of the form 1040. So if I go back to the 1040 on page one, we get to deduct half of that 7,065. We can see that as well on the Schedule SE taking half of that amount, rolling that through to the Schedule 1 page 2, adjustments to income. There's the 7,065 totaling up at the bottom, pulling that into the 1040. So there it is here to get to the adjusted gross income of the 935. Then we've got the standard deduction, which is the 12,950 for a single filer. It will be doubled when we move to a married filer. And then we've got the qualified business income. We'll jump into that later, but I'm going to rely on the software. It's calculating at the 15,994 for now. And then that's going to get to the taxable income of the 63,988. If I go to page two, we've got the tax calculated as well as the self-employment tax. So total tax, 23,821. I'm going to assume we paid 30,000 on estimated payments. And that gets us to the refund of 6179 in our starting point. Now we could mirror that over here in our worksheet as well. I'm not sure how much I'm going to jump back on over here to the worksheet because I want to focus in on our differences in the software. Because we looked at the worksheet in a prior presentation. So let's take everything the same now. But now let's say we move up to married filing jointly. So now we have Mr. Anderson and Mrs. Anderson and no dependents. We still have the 100,000 flowing in the same. We still have the 7,065, the same. The only difference here being is that we've got this big difference of the standard deduction jumped up from 12,950 to 25,900. Because we've got the married couple. And then on page two, the tax calculation, federal income tax has changed because of the rates and the filing status. But we still have this number for the self-employment tax, which is the same. Now you might say, well, what does it matter then if I allocate the Schedule C income to one spouse or the other? Because they are now joint as one entity. So you can see clearly on the Schedule C, we're allocating it to Mr. Anderson, not Mrs. Anderson. But what's the difference? Who cares? One of the major differences is going to be the self-employment tax. The self-employment tax may not differ if it was owned by a different spouse. But it's going to be paying into the social security of the individual, even though they're married. As a married couple, if you're trying to maximize the amount of benefits you're going to get in retirement, you want to think about how can you pay into social security so you get the most paid out of social security in retirement. So there's a misallocation here if it was owned by both spouses. So now that you got the question, OK, well, what if it was owned by both spouses, then what are my options? Well, one is that you can have a partnership return, because in essence it's a partnership then, but then you would have to file another return, which would basically be a flow-through entity, and then the K-1s would be used to populate on the tax return. You'd have two K-1s from the flow-through entities, which would help you to properly allocate the self-employment tax through the flow-through entity. So that's one option that could be used. Another option is you might be able to have community income. So here's just a quick recap on that. If you and your spouse only own unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as sole proprietorship or a partnership. So state with community property. That includes Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. So in that case, you would think, well, if it's community property, we should just split this thing down the middle, and each of us spouses should get an allocation of an equal amount to our social security benefit thing. That's what you would kind of think. And so I'd say, okay, one way you might be able to do that is to assign it not to a taxpayer in the software. We're going to say now it's joint. By the way, if I assigned it to the spouse, then you'd have the same thing, but in reverse. So now you've got the same 1040 here, the 100,000 flowing through everything is going to be the same, except that on the Schedule C, it's now being applied to Jane Anderson instead of Neo Anderson, and all the benefits are going to go to Jane's social security number. If you then say it's joint, which you have to be careful to be able to make sure you can do depending on where you are located, then we have the one Schedule C here once again, but it says up top now it's Neo and Jane Anderson, and then everything else is the same. It flows through to the 1040. It's all the same for income tax. Income tax evasion. Next purposes, but when I go to the Schedule SE now, I have two of them, Neo and Jane. So now that nice and easily allows me to populate one Schedule SE while still being allowed to have two self-employment tax calculations, which the total should still come to the same total, but now for their particular benefits so that when they get their benefits, it should be allocated to them separately, and that could be a big deal when you're trying to kind of maximize your social security benefits that would be coming out at the end. I got a different check mark here. This is 1413130. If I go back on over here and I say it was for a single taxpayer, it's 14129. So it's pretty, so obviously again, this, because it's a flat rate that we're using, this one's coming out to be the same. That's the total taxes. It's just being allocated between the two and it's a rounding difference. That's why it turned red. But it's still 14130. So that looks good. That's to be expected. So that's one way that you can do that. Now, if you're not able to do that, then another thing you might be able to do is have a qualified joint venture or to have a partnership return, right? So if you and your spouse each materially participate as the only members of a jointly owned and operated business and you file a joint return for tax year, you make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Making this election will allow you to avoid the complexity of form 1065, but still give each spouse credit for social security earnings on which the retirement benefits are based. So to do that, you may be able to basically make two schedule C's allocating the proper amounts to each schedule C. So for example, to make this election, you must divide all items of income, gain, loss, deduction and credit attributable to the business between you and your spouse in accordance with your respective interest in the venture. So if I was to go back on over and say, notice that this one split it 50-50 as we can see here. Now, if you were trying to maximize your social security benefits or whatnot, it might be more beneficial to have one or the other spouse allocated more of the income depending on their other information with regards to putting money into the social security and you can try to plan out what would be best for social security. But if the agreement was something other than 50-50, then you might be able to use the joint venture kind of system to allocate it differently, to allocate the income differently or a partnership. If you use a partnership, you have to file a separate return and then you can use the allocation methods to allocate whatever the allocation agreement was, whether it be 50-50, 60-40 or whatever. And then or you might be able to file in essence to schedule C's which might look something like this. I would have to take this schedule C. This is kind of tedious. You'd have to say, okay, I'm going to say, let's add another one. And let's say this one is going to be for the spouse and the first one is going to be for the taxpayer. And then I'm going to say this is going to be 120. Let's say we'll take, well, let's just make it easy and make this 100,000 and just to give an example. So the whole 100,000 and let's say that it's going to be 60-40. So let's say we're going to take that 100,000 minus 40,000, which will leave us 60,000. And then on the second one, it would be the same information. And I won't repopulate all the information, but I'm going to say this is for the spouse. And the bottom line is that this would be the 100,000. And then I'm going to take minus 60,000 of it, which is going to leave us 40. So that comes up to the 100,000 again. Right. And then if I go back on over here, now I've got a schedule C, but now I've got two schedule C's, one for one spouse at the 60,000, the other for the other spouse at 40,000. And they're both allocated to the two spouses. And that would total up to the schedule, the schedule S-E then I have two schedule S-Es, which I tried to differentiate now to allocate based on whatever our agreement is in a similar way that we might do in a partnership that might be different than just 50-50, which may not have a big impact or any impact possibly on the federal income taxes, but could have an impact on the social security benefits that you would get. Right. That's kind of the whole mess that has been created here that we are finding ourselves dealing with. So if I go into then page one, then you still have the 100,000 here. And on page two, we still have the same social security that has been calculated, social security and Medicare, the self-employment tax. But now we have a different allocation based on the two schedule C's. So if you're going to make that election, you want to do some more research on that and think about what your best option would be. So if you're a married couple and you're in a community property state, you might be able to do the easy thing. One schedule C, splitting everything down the middle, which means that your allocations to the social security will be split down the middle. Or if you want to do more complex planning for the amounts you're going to get from social security benefits possibly because, and you want to allocate that differently or for whatever reason, or you have a partnership agreement that's different than 50-50 or you're not in a community property state, you can think about maybe setting up a partnership flow through entity, which allows you then to have a breakout that's other than 50-50 if you so choose. But you have to do another tax return and use this K-1s that will then flow in here. And then you can use the K-1s to do the allocation, which will then drive the social security, the self-employment calculations. Or you might be able to do this method with basically two schedule C's possibly looking into a qualified joint venture situation, which is tedious, because then you have to basically populate two schedule C's in accordance with whatever allocation you're using. And I've never actually done that because I'm in a community property state, but that's another option that you can basically drill down on and look into and see if that would be easier than say a partnership return in that situation.