 Income tax 2022-2023. Special depreciation allowance tax software examples. 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 here, single filer Mr. Anderson living in Beverly Hills 90210. No W-2 income because they have the business income down here line number eight. Let's take a look at the flow-throughs coming from the Schedule C. Profiter loss from business. Income statement format 120,000 minus the 20,000 gets us down to the 100,000 flows into the Schedule 1 which flows into the form 1040 line number eight. We have self-employment tax to deal with with flows from the Schedule C. Bottom line in essence net income flowing into the Schedule SE calculating the tax social security Medicare self-employment tax 14129 flows into Schedule 2 which flows into the form 1040 page number two self-employment tax. We also have half of that which is going to be deductible on page one of the 1040 we see here. 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. That's calculated by going to the Schedule C the net income then flowing into the Schedule SE self-employment tax self-employment tax calculated half of that in essence being the above the line deduction 7065 that flows into the Schedule 1 page number two which flows into the form 1040 as we see here. So we've got the 100,000 minus the 7065 gives us the 92 936 80 GI the 12,950 standard deduction minus the qualified business expense of the 15994 which we're letting the software calculate gives us to the 63 988 on the second page we got the federal tax being calculated at the 9692 income tax that is social security and Medicare self-employment tax 14129 total tax 23821 30,000 estimated tax payments to get to the bottom of 6179 we're focused here on the Schedule C however so let's move on over to it the Schedule C income statement we're looking at the depreciation in prior presentations how i would think of the depreciation is in essence first straight line depreciation as a conceptual format the concept being that if something is is large enough or something is a depreciable asset we would not be putting it on here as an expense but rather have to put it on the books as a depreciable asset which is understandable from an accounting concept theory basis then we'd use the tax code to do the depreciation the normal baseline depreciation usually is makers depreciation which is usually a form of double declining balance that we talked about in prior presentations but then we could layer these front line depreciation things 179 and special or bonus depreciation on top of it which are basically not in alignment with generally accepted accounting principles but used to basically stimulate the economy or to make politicians try to get you know in their job again or whatever whatever they're doing over there so you would think that the 179 and special are the things that might change most likely into the future as the economy overheats and then goes back down those are one of the tools that they kind of use to try to stay in equilibrium so we'll see what happens with them going forward and the underlying thing which was makers will stay much the same because that's the conceptual framework behind depreciable assets in the first place so now these two the 179 and the special are kind of connected in that they do similar kind of things the 179 you might have a little bit more flexibility that we talked about last time but they both give you this front loading depreciation so if you're small business you don't have a lot of like a high dollar amount of depreciable assets and they qualify for both 179 and special the net result will likely be a similar type of result where you would have said hey look I could have just appreciated it as machinery expense or whatever you would have called it but you made me put it on the books as an asset and then and then you allowed me to depreciate the whole thing in year one as if I could have just appreciated it in the first place with either 179 or the special so we talked about the 179 last time now let's look at the special depreciation now notice most software will kind of default at least the cert does here to assume that you're going to take the special depreciation if it looks like it's qualified property so for example if I say machinery and I say this is going to go to the form schedule c schedule c and the category I'm going to say is machinery and the cost let's just start with that 10 000 again and the method let's say it's going to be five years five year property to make the calculation easy to see I'm not going to put any 179 in there and I'm not going to elect out of the special depreciation which means that it will by default put the special depreciation in place generally if I put a date I have to put a date too so 01 01 oh let's just say let's say 01 23 whatever 22 and then pull it back on over so then the whole 10 000 got depreciated just like I would have just dispensed it right if I go to the depreciation for 2022 the schedule so get the full schedule there's the machinery it went on the books there's the 10 000 and it took the whole thing as the special depreciation so it took the whole thing as special depreciation and now my my basis going forward to zero I'm not going to have any depreciation going forward it's kind of as if I just expensed it in the first period that's kind of like the default of you know the software is going to generally take because I didn't assign any 179 and I didn't say that I'm electing out of the depreciation special depreciation so if I layered that a little bit if I added the 179 to it for example and said I took I took 179 of 1000 and then I go back on over here so now it's it's doing the 10 000 cost 179 was 1000 the 10 000 minus the 1000 is the 9 000 I still didn't elect out of the special depreciation so in essence it's still taken the full amount of the of the 10 000 but it's so the 179 is kind of before the special depreciation in the calculation process so now let's say I wanted to elect out of the special depreciation so let's say I bring this back down to nothing on the 179 and I say I want to elect out of the special depreciation so now so elect not to claim additional depreciation depreciation so I'm going to make that election and notice here's where the a little bit less flexibility we have we have to elect the class of property so it's going to be for all classes of property or to select basically a property class that we're making the election for a whole class of the property class so now if I say I'm not going to do the special then I'm going to go back on over here is that too so I didn't do the 179 or the special in this case and I elect I elected out of it so now we've got the the 10 000 it's just being depreciated at the normal makers depreciation so now we've got the 10 000 makers depreciation if I divide it by five years 2000 that would be straight line it's usually it's really double declining if I take that divided by 10 000 I get the 220 percent if I double that times two 40 percent that's the double declining rate times the 10 000 there's the 4 000 that I should get if it was a full year but it's a half year convention so I divide it by two and that's where I get you know the 2000 so it'll be the electing out of the special now let's remove the election and just look at that cap on the 179 just to look at that I'm going to say okay we're going to remove the election I'm going to bring my schedule see income up a lot let's bring it up to like five million so we don't have any income thresholds that are going to restrict us here and then let's go back to my depreciation and let's say that we had a piece of property that we're going to be putting on the books for let's say two million and let's say I try to take the whole two million the software is going to limit me here for the 179 deduction and then I didn't remove the special election so if I go back on over and say all right what's it going to do if I go to the to the depreciation schedules let's take a look at the regular one so now I've got the two million the 179 was capped as we saw before one million eighty thousand and then the special doesn't have that cap so it took up the rest of it at the nine hundred and twenty thousand so in other words if I and you can see that so you can see the cap at the 179 that's not being applied for the special if I basically remove the 179 say I'm not going to do the 179 just have the special then again the whole thing is being taken on the special at that at that time new depreciable basis going forward for two thousand and twenty three okay so now let's pretend that it's a listed property here so I'm going to say let's say like it's a car so I'm going to say now it's an automobile and let's say it's a hundred thousand dollar car I'm not going to put any no 179 but I'm going to say now it's going to be makers five year that's going to be have those auto limitations with it so now we might have a limitation so I'm going to go back on over and say that the cap was at the the 179 hold on it took the let me do that again let's go back on over to the appreciation here so now it capped it at at the nineteen thousand two hundred in other words if I brought this car up to two hundred thousand it's still at the the nineteen two because it was because the limitations for the auto limitations now if I if I don't take the special or if I remove the special and I have the auto limitations applied for example and I say I'm going to elect out of the special for whatever reason and I'm going to say okay let's do that boom now I'm limited for the auto at eleven thousand two hundred and then obviously whatever's left over is going to be depreciated in the future now there's other considerations with the auto that we talked about before is it a is it a work vehicles that subject to to the the auto limitations listed property is listed property subjects the limitations are you going to do a direct write-off method versus a percentage method and so on and so forth but you know you want to be taken into consideration the rules with related to special depreciation which could be limited for listed property and in automobiles for example so now let's take a look at a situation where we have a loss that was created by it by the property so I'm going to say now it's two hundred thousand and it's not subject to the auto limitations and we're going to take the we're going to take the special so now I've got the in the depreciation schedule the whole amount is here if I go to the form four five six two the depreciation we've got then the special depreciation allowance is at the 200 000 and then if I go to the form schedule c all the income is here hold on a second I need to change the income let's go back on over here and put my income back to 120 000 all right now I'm going to go back on over and say depreciation is still taking the full 200 if I go to the four five six two then the 200 is here in part two special depreciation and then if I go to the schedule one we've got the hundred thousand loss here and then if I go to the form 1040 we could see the hundred thousand being pulled over for the loss on the 1040 that's a little bit different than the than the what we saw if we had it on the 179 so in other words on the schedule c if I go to the schedule c the full 200 000 is being pulled in here and I get the full 100 000 there's now showing as a loss and that loss then is pulling over in essence to the form 1040 and possibly could be taken against something else now because I have a loss here I might have a carryover situation but if I had other income like w2 income for example and I said I had w2 income of 200 000 let's say 300 000 I already used 200 000 just to put a number in there 300 000 so I've got w2 income of 300 000 let's just just to put a number because then it's going to swallow up that loss right bringing it down to 200 and so on now if I if I if I let's take that off for now take that back off and say okay back on over now if I have that loss I might have a carryover kind of situation here let's now look at it if I had like we saw last time with the 179 let's say I took let's say I I make this 100 let's say let's say it's 200 and let's say I take the whole thing at 179 and then if I go to the depreciation schedules I still have this 200 000 here but if I go to form 4562 now there's the 200 000 in part one now but it limited it to the 100 uh the 100 000 and then I and then it gave me a carryover of the added 100 000 here so it treated it a little bit differently in the format that it's that it's being put in right so now so now if I go to basically the the form 1040 now I've got nothing that's that's showing up here I don't have like a loss situation but I still have like this carryover of a potential benefit that could be benefiting in the future for the loss so it's a similar kind of outcome but it's a little bit different in the way it's being applied if I put for example the w2 income I still might be able to get a benefit from the w2 income w2 income let's I said that was 300 000 so if I put the 300 000 then possibly the notice now it's it's is creating the loss from the 179 which is pulling into the schedule one there's the 100 000 loss pulling into the form uh the 1040 so in other words if I look at the schedule c this amount here is 200 000 now when I added the w2 income but if I remove the w2 income I'm gonna say remove that now it's at now it's at the 100 000 it limited it to bring the net income to zero because I don't have any other income either and so but if I do the special it treats it a little bit differently as we saw just one more time depreciation and I say I say let's let's do the get rid of the 179 and do this just the special and so now the 200 000 is there and I have a loss so instead of it limiting the loss and then carrying over the 179 it takes the full amount of the special and then takes that loss on over to the form 1040 which possibly could be carried for it as an NOL uh in that fashion so so it's kind of interesting if you have a loss which of those might be more beneficial going forward they're similar but possibly not exactly the same now note that if you disposed of the property after taking the special depreciation we we note what's what's basically happening here we've got this massive depreciation up front which means that property that you might be using at least for five years and beyond that because the the useful life is probably still shorter than maybe you might be planning on using it even if you're planning on using the equipment for 10 years you put it on the books for five years because that's the property class it's assigned to which means you would be already accelerating the depreciation and then you depreciated the whole thing in year one so if you sold it at any point in time in the future now you're going to have a gain of some kind right because your basis has now been brought down to zero so then and then the question is well when you have the gain you might have to have you know that question of how you're going to tax the gain as ordinary income or or uh capital gain and you would think that you would have an like an ordinary income situation like a recapture kind of situation because of the because of the deduction you wouldn't get a more favorable rate you would think on the gain because you you've got this a special depreciation that possibly caused the gain otherwise when you sold it if the depreciation worked purpose perfectly on a counting standpoint which it doesn't there either you know it's an estimate then you would have a much less of a gain when you sold it because that's kind of the point or part of the point at least with machinery like buildings could go up in value even though you depreciate the cost but that's the general idea with the special so the general rule I would think then would be when you when you have the asset should I put it on the do I put it on the books as an expense or an asset if I have to put it on the books as an asset then what's my depreciation going to be I would think first conceptually makers depreciation lines up to close you know more similarly to normal concepts of depreciation and then layer on the concept of 179 and special depreciations to depreciations likely to change most likely to change as laws change going forward as they try to adjust to the economy and everything else going forward