 Income tax 2021-2022, business income part one. Get ready to get refunds to the max, dive 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 looking at line one, although we would have another schedule, basically being an income statement, income and expenses. The expenses basically being deductions, the net then flowing in to line one income of the income tax formula and page one of the 1040 we're looking at now. We've got the schedule C flowing into schedule one, then flowing into page one form 1040 line number eight. Here's an example of the schedule C, basically an income statement. Now looking at the business income, and that's gonna be the top line of in essence, the income statement that we would expect to see basically on the schedule C. So this chapter primarily explains business income and how to account for it on your tax return and what items are not considered income and gives a guideline for selected occupations. So clearly when we're thinking about income for the taxes, we've got the same kind of thing as income in general for taxes in general, meaning the IRS generally counts something as income unless they say otherwise. Now we have the added complexity of saying, well, what kind of income is it? If it's gonna be income, is it gonna be business income? Is it income I should be reporting then on the schedule C? If it's reported on the schedule C, then note that it could be subject to the self-employment taxes. So just if we're thinking about income that has to be reported somewhere or possibly maybe not have to be reported, we would rather of course not have to report income, income's good, but it's bad for taxes. It flips everything upside down. And then when we have to report it on like a schedule C, it could have a good side because that means that we can apply expenses to it as opposed to say if it was like a hobby or something like that where we don't have as much a capacity to apply expenses to it, but it also has a bad side in that we have to apply self-employment taxes to the basically the bottom line, not the income top line, but bottom line in essence of the income statement and the social security could be a lot because that's kind of like the employer and employee portion of the payroll taxes. Okay, so income, if there is a connection between any income you receive and your business, the income is business income. So obviously if you have some kind of business and the income you got is connected to it, we would expect to find that you would think on the schedule C, business income. A connection exists if it is clear that the payment of income would not have been made if you did not have the business. You have business income even if you are not involved in the activity of a regular full-time basis. So you might say, hey, I've just got like this side job where I made a few hundred thousand on the side, but I have this other W-2 job. Well, you know, even if you made like 20,000 or something on the side, it's still gonna be income even though it's not full-time job for you at that point in time, it doesn't need to be basically supporting you, for example, entirely in order to qualify as business income and for the IRS to want their share. Income from work, you do on the side, in addition to your regular job, it can be business income. For example, you may be in the business of providing services for a ride-sharing business as a second job, that's income. You report most business income such as income from selling your products or services on schedule C. That's where we're gonna put it. That's the business income sole proprietor unless you're set up at some other kind of entity, for example, but you report the income from the sale of business assets such as land, office building on other forms instead of the schedule C. So if you have business assets, even if you're a cash basis business, remember that the schedule C is basically an income statement. We don't have the balance sheet, in other words, on the tax return for sole proprietorship, but we have some balance sheet accounts, those being the property planting equipment in a sub-schedule, basically the depreciation schedule, and if we sell something, we could also have things that are kind of like business related, but they might be reported like on other forms, for example. So in any case, for information on selling business assets, you could see chapter three, so we could dive into that in more detail. Those would be selling like depreciable assets, for example, non-employee compensation. Business income includes amounts you receive in your business that were properly shown on forms 1099 in EC. So if you have a sole proprietor business, like you're a contractor or something, and you work for other businesses, like corporations, then they're gonna want to issue you a form 1099 because they're required to buy the government. So you will likely be getting documentation showing the amount that they paid you. Notice that the amount that they paid you is not going to be the net amount, it's gonna be the gross amount, meaning the total amount. They're not gonna take into consideration the expenses that you have, they're just gonna pay you what they pay you, that's what they're gonna report. So all the expenses that you have, you gotta report them on the Schedule C, otherwise the IRS will only have these 1099 in ECs, and they'll try to charge you on the top line, the gross income instead of the net income because they don't have any of the expenses. Also realize that if you're in a business where you're not working for another business, but rather for like an individual, a customer, a consumer, such as like a hair salon type of thing or something like that, then you're not gonna get a 1099 in EC because obviously the government does cannot pressure an individual to give a 1099 because they don't have the same kind of leverage because the individual doesn't get a deduction for getting their haircut, for example. So that means you're not gonna get the 1099, the IRS doesn't have the 1099, but you still have to report the income because the 1099 should just be a reporting document to double check that you're doing your job of reporting the income, right? It's the tax system supposed to be like a good faith system where you report the income that you've earned and it's turned into not so much good faith because the IRS wants to have the documentation, but even if you don't get the documentation and the IRS doesn't have it, you should still and are required to report the income. So this includes amounts reported as non-employee compensation in box one of the forum. You can find more information on the instructions on the back of the form 1099 in EC. You receive payment card and third party network transactions. If you are in a business, you may receive a form 1099K representing total dollar amounts of total reportable payments transactions. So here's another kind of format that you might get basically your business income in. Hopefully you're tracking the income on your side too, like in some kind of accounting system. So you already have your income number. Just realize that your income number on your accounting system should be or will need to be at least the sum of these documentations generally or above because you might have some income that weren't documented here. If it's below the amount reported by these documents, what's gonna happen? The IRS is gonna say, hey, wait a second, we've got a higher number on the top line, the income line, not the bottom line, not net income, the top line of the income statement higher than what you reported. We think you under reported so that you're almost surely gonna get some questioning about that, right? Because they have the documentation, the computer can come up with a question about that kind of problem. So you would think that your income would be at least the sum of those 1099s or higher. And then your net income might be quite much lower because then we have the expenses. So this may not be the amount shown, you should report as income, as it may not include all the receipts and it may include items that are not included in your receipts such as sales tax. So business income deduction, income you report on schedule C may be qualified business income in a title U to a deduction on form 1040 or 1040 SR line 13, C form 8995, A or form 8995 to figure your deduction if any. So we may dive into the business income deduction in more detail in future presentations, kinds of income, you must report your tax return, all income you receive from your business unless it is excluded by law. That's the general rule for the tax code just like kind of in general for income in general, you gotta report it unless we say otherwise if it's kind of some income related item. In most cases your business income will be in the form of cash, checks and credit card charges. That's what we would expect. That's what we kind of think of with regards to the income or how we're going to be receiving income at some point in time. Although we could of course get payments in other ways such as a barter type of transaction, don't think that a barter type of transaction is gonna be a way to exclude or get away from income at least not legally, right? Because you still have an income situation there too. So, but business income can be in other forms such as property or services. These and other types of income are explained next. If you are a US citizen who has business income from sources outside the United States for an income that is you must report that income on your tax return unless it is exempt from tax under US law. If you live outside the United States you may be able to exclude part or all of your foreign source and business income. So if you're outside the United States that can be a little bit more complex. So you wanna make sure you're diving in to the tax relationships and so on and making sure you're picking up the proper taxation in that case too. So for details you can see publication 54, tax guide for US citizens and resident aliens abroad.