 Income tax 2022-2023, business expenses, insurance and payroll expenses, software example, let's do some wealth preservation with some tax preparation. 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. 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, Single Filer, Mr. Anderson, Living in Beverly Hills 90210, No W-2 income, we've got the business income. Let's look at the flow through of the business income. It comes from the Schedule C, Profiter Laws from Business Income Statement Format, the net income in essence, rolling then in to the Schedule 1. That's not Schedule 1. Schedule 1 and then that rolls into the Form 1040 line number 8. We know there's going to be self-employment tax calculated. That's done by taking the Schedule C once again. Schedule C net income flowing into Schedule SE self-employment tax, calculating the self-employment tax 14129, which is on Schedule 2, flows into Schedule 2. And that flows into the Form 1040 page 2. And there's the 14129. Half of that is deductible, which we can see on page 1 above the line deduction adjustment to income there. That is going to be calculated Schedule C net income used to calculate the self-employment tax of the 14129. Half of that, 7065 deductible, it flowing then to Schedule 1 page number 2. There it is, that flows due to the 1040 right there. So now we've got the 100,000 minus the 7065 is 92935, 12,950 standard deduction, 15,997. That's the Qualified Business Income. And then we've got the net income 63,988, page 2 calculating the tax, the tax, federal income tax, and the Social Security and Medicare self-employment tax. It comes to the 23,829, 30,000 was withheld. That gets us to the 6,179. Back to page 1, we're focused on the Schedule C. So if I go back on over to the Schedule C, we're looking at deductions related to insurance. Now most of the time, the insurance deduction is going to be fairly straightforward, although you do have to be careful with regards to the accounting side of things. So as a tax preparer side of things, you want to be thinking, am I doing a lot of work to help out with the bookkeeping? Or am I have a system set up that the income statement they give me is basically good to go? And I'm just going to basically do the data input. So in other words, if they already have their insurance basically set up and they give you the income statement formatted properly, then the insurance that's deductible should be already in place. And you can enter that just as an expense as you do the data input into the system. But you also might have questions in terms of when to deduct the insurance on a cash basis versus a cruel-based method, because the insurance is something that we usually prepay. We pay it before we actually get the coverage. That's something that you want to keep in mind kind of from a bookkeeping side of things. Note that most of the insurance that we think of that is business-related would be something that would be deductible, like liability insurance, health insurance if it's for the employees and so on. And then we might have the insurance that's deductible for health insurance that's personal for us in special kind of situations, which wouldn't be on the Schedule C but possibly rather on the above-the-line deduction, which we'll take a look at. So I've added the insurance. So insurance right here, again, if I've accounted for it properly and it's business-related, ordinary and necessary type insurance like liability insurance, for example, it would be here. Note you might have car insurance. We talked about the automobile deduction in a prior presentation, which gets a little bit more complicated because you have to choose as to whether you're going to be using the direct method or the percentage method oftentimes and the insurance would be included in something if you're using the direct method. So you can go back there if you want to take a look at the deduction related to the automobile in more detail. Note that if you're looking at the bookkeeping or an income statement provided from a client to you, then you have the question oftentimes if they just have one line item on their income statement that says insurance, then you're going to have to ask and say, well, what is this insurance? Is this business insurance possibly or is it going to be insurance for something else? Do we need to break out the car insurance so that I can then determine whether or not the car insurance should be deductible or not? So that's often kind of a bookkeeping issue. If there's just one line item for insurance, you might have to break that out to make sure that they are ordinary and necessary insurance deductions and not personal insurance and that you've broken out the car insurance properly. So it's just from a logistical standpoint that is important. Now then we have the health insurance for ourselves. Now remember if you had health insurance for the employees, you would expect that to be an ordinary and necessary type of business because you're basically paying the employees in that format. But what about our own self health insurance? Because remember, we're not employees of ourselves in that we don't issue ourselves a W2. But remember that we are employees in a sense because the net income here is being subject to the self employment tax, which as we saw in a prior presentation is basically the payroll taxes both employee and employee are a portion of it. So if we were in a situation where we were an employee of a corporation, they would get a deduction for the health insurance. So you would think that we should get a similar kind of benefit. So for example, in other words, if I was like a corporation with a separate legal entity, then I might have to pay myself in that situation because I would have to issue myself basically a W2 income because the corporation is a separate legal entity and then the corporation would get the deduction for health insurance if that's going to be a deduction. If you're going to treat me like an employee of myself by subjecting me to self employment tax, which is similar to employee and employer payroll taxes, you should think I should get a benefit for my own health insurance. Okay, so you generally do, but it's not going to be here on the schedule C and it could be you want to look at limitations to it as well. Because for example, if you have access to health insurance through another job, so say you have your schedule C income and you have W2 income, then you might have access to the health insurance through as an employee or you might have a spouse that has access to the health insurance. And generally the IRS kind of likes people to be taking advantage of the health insurance policy from an employee or employee kind of situation. So you want to make sure if you have any restrictions there. But if you don't have any health insurance available to you through other means, then you think you may be able to deduct an above the line deduction for the health insurance. So that's going to be over here. So we're going to say health insurance page number two schedule one. So we have it here for the health insurance. Line 17 let's jump to the data input. I'm going to say health insurance and let's say it was 7000 let's say on the health insurance and I pull that on over. And there it is. So that's going to be included here if I add that up and then move that on over to the form 1040 then it flows in through to the 1040 as an above the line deduction or just adjustment to income. So there it is right there. Now you might say well why isn't it on the schedule we'll see and there could be a couple of reasons but one one one thing with the health insurance is that usually it can't allow you to go below zero. So if you didn't have income you're going to be limited to how much the insurance can be and if they put it here it would cause like a circle reference. So it's a little bit easier to calculate for that reason is one reason that it's going to that it might be over there. So for example if I brought the income down let's bring our income down on my business income income for the schedule C and let's say that this was let's say this was 100000 and then boom. So now I had 10000 let's make it a little bit higher. Let's make it 115000 and then we'll bring that over. So now it's well if I did that it's going to eliminate. So now I have a loss right. So the loss now I don't have the health insurance that's being it's being picked up on page two. I'm not on page two there it's gone. So then if I go back on over let's make it let's make it 110000 and bring that over. And so now I've got my schedule C where I have exactly zero. Let's make it a little bit higher than let's make this 105. So now I have 5000 of income and you can see in schedule to the I'm not schedule to schedule one page to I've it's limited the the self employed health insurance now. And so here's a worksheet showing the limited amount. So so it's going to be subject to having income basically shouldn't be taking you below the income threshold is the general idea. So when you when you're doing your your taxes then you want to do a couple of things with the health insurance. You want to be thinking OK is the health insurance being included on my my income statement for the for the individual. And if it is then I need to take it out of the schedule C here because I need to possibly deduct it somewhere else. And if there is no health insurance that's being deducted for the individual then the question is well why is that is that because they're being covered for health insurance in some other way through through another like a W2 job or something like that or spouses job or do they have a self employment health insurance that possibly could be a deductible that's not on the income statement wouldn't be on the schedule C but possibly an above the line deduction. So you want to kind of keep that in mind. That's always a question you want to be thinking and make sure you've got straight with regards to the health insurance of a taxpayer that has a schedule C business. All right. So now let's look at the payroll. So notice over here the payroll is another one of those items where you have to be thinking am I just going to assume that payroll is done correctly. And my job is just to do the data input into the schedule C with a payroll that is properly formatted or are you going to take on the bookkeeping of actually helping them process the payroll kind of situation. Remembering that payroll can be quite complex because you got to deal with the quarterly taxes and the withholdings and all that kind of stuff as well. You might want to be working with a bookkeeper as a tax preparer and or a payroll professional to help clients out with and be working in a network type of situation. If you're just doing the data input for the payroll you may still want to do a double check on the payroll items because notice that the wages here which aren't going to be including the wages of the owner because they're going to be paying self employment tax. So remember on the net income. So this is a deduction that we paid to employees not contractors but employees that we have here. And we also have reporting the the the taxpayer would also have to have reported generally 941s on a quarterly basis reporting the self employment tax social security Medicare and federal income tax that was withheld. As well as a form 940 at the end of the year for for FUTA federal unemployment tax and they would they would have the W2s and the W3 which which would summarize the payroll that has been paid. So you would think that you would want to look at those forms that have been given to the government and see if they match the deduction that we have here because if they don't match that could be like a red flag you would think. Because the IRS has everything to to see that the fact that those two things don't match. The other thing that you might want to kind of just keep in mind people always get messed up on payroll is the amount that should be on wages versus the amount that should be payroll taxes. Sometimes people include those two things on one line item. It's more clear if you break those two things out into two separate line items for the for the wages and the payroll taxes because that's you know that's how often it's going to be formatted. And the payroll taxes though do not include the the employee taxes because the employee taxes were withheld from their wages and therefore therefore those are actually their taxes. The amount of taxes that we had to pay over and above the the taxpayer had to pay the employees over and above Social Security and Medicare and some food for example possibly state taxes. Those are the taxes that should be broken out over here. So you might want to get the W3 of the 941s and just double check that these numbers line up as just a is just a standard kind of process to give a verification that everything's everything's lined up appropriately.