 Income tax 2021-2022, business income part number six. Get ready to get refunds to the max diving 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, Line 1, Income. Subletcher would be supplementing it, which would have in essence an income statement, income and expenses. Basically being deductions to net then rolling in to line one income of the income tax formula and page one of the form 1040. We see here where we would have the schedule C, rolling into the schedule one, rolling into page one as we see here of the 1040 line number eight. This is the schedule C, the profit or loss from business basically an income statement. So now we're looking at other income. The following discussion explains how to treat other types of business income you may receive. So obviously normally business income as we've seen in prior presentations could be fairly straightforward because you're thinking about the general thing that you do that you generate income in and now we're getting into other types of incomes. Restricted property. Restricted property is property that has certain restrictions that affect its value. So if we do work and we get paid in cash, it's straightforward. If we get paid in something else, we have to value the thing that we got paid in. And if there's a restriction on what we can do with something that would lower the value of it, at least for the point in time that the restriction is in place. And then if they removed the restriction, then that would increase the value. So the question is, how do I value it at the point in time? The work was done and we got the property. What happens if the restriction was removed? So if you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C when the restriction is lifted. However, you can choose to be taxed in the year you receive the property. So you could take a look at the publication 525 for more information if that's applicable to you. Gains and losses. Do not report on Schedule C a gain or loss from the disposition of property that is neither stock in trade nor held primarily for the sale to customers. If it's held primarily for the sale to customers, you would think then it would be like the inventory that you're selling, possibly part of the cost of goods sold. So that means that it could be reported elsewhere if we're reporting something like property that was sold. Then we might use other forms and schedules that we've talked about in prior presentations. Remember, as you're thinking of the Schedule C, it's kind of like one half of the full financial statements. We've got the income statement, but not the balance sheet. So that means that some things such as, for example, property, although we don't record a balance sheet, we might have a schedule for property, plant and equipment or depreciable assets that would then be tracking that asset and the accumulated depreciation related to it. So if we had sales, then it could be reported. On some other form other than the Schedule C. Instead, you must report these gains and losses on other forms for more information. You can see Chapter 3 of the publication. Then we have the promissory notes, report promissory notes and other evidence of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers. So that's basically you would think kind of like inventory. So if it's held primarily for sale to customers, that's basically going to be kind of inventory. And if you sold it for cash, that's pretty straightforward. But if you sold it for a promissory note, then that would, depending on the method that you're using, you would think that that would be income at the point in time that the sale was made at the point in time you earned it on basically an accrual method. In general, you report them at their stated principal amount minus any unstated interest when you receive them. If you reduce or stop your business activity, report on Schedule C any payments you receive for the lost income of your business from insurance or other sources. Report it on Schedule C even if your business is inactive when you receive the payments. And then we have damages. You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Patent infringement, breach of contract or fiduciary duty, antitrust injury, economic injury, you may be entitled to a deduction. So obviously this would be a good side against the income if it compensates you for actual economic injury. Your deduction is the smaller of the following amounts, the amount you receive or accrue for damages in the tax year, reduced by the amount you pay or incur in the tax year to recover that amount. Your loss from the injury that you have not yet deducted. Then we have the punitive damages. You must also include punitive damages in income. So we have the kickbacks. If you receive any kickbacks, include them in your income on Schedule C. However, do not include them if you properly treat them as reduction of a related expense item, a capital expenditure or cost of good sold. So generally if you get a kickback, you got to include the kickback typically unless it's going to be matched up with one of these expense items and it's more appropriate to do so. Recovery of items previously deducted if you recover a bad debt or any other item deducted in the previous year. So bad debt basically meaning that you determine that you have an accounts receivable that was not going to be collectible. So you wrote it off as bad debt. Now notice that would basically assume that if you got a benefit from it from the bad debt that you're on an accrual basis method, you wrote it off and then someone comes back in and pays you. This person that you thought was dead that was off, they haven't been able to contact him in five years, comes in and pays you what you wrote off in a prior year as bad debt. Well, what do you do? Do you go back and fix the prior year return or possibly what we would like to do is not do that and fix it here going forward, possibly recording it as income. So if you receive a bad debt or any other item deduction in a previous year include the recovery and income on schedule C. However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. So then it gets a little confusing because now you got to think did you get a benefit from the write-off in the prior year? If you did, and this is similar to like the state tax refund with the itemized deductions you might have thought about before but if you got a benefit, the deduction benefited you from a tax benefit in the prior year, then you should include it in income but if it didn't, then you shouldn't is the general rule. So if you include part of the recovery from income you must include with your return a computation showing how to figure the exclusion. So what if there's some part benefit that you got then you got a whatever reasonable compensation you came up with you got to show that exception for depreciation this rule does not apply to depreciation you recover depreciation using the rules explained next. So we got recapture of depreciation and the following situation you have to recapture the depreciation deduction this means you include in income part or all of the depreciation you deducted in previous years. So depreciation is an interesting topic here because remember from an accounting standpoint you basically take depreciation allocating the cost over the useful life of the machinery and equipment that you have instead of deducting that in year one but on the tax side we often intentionally they often intentionally front load the depreciation that you're going to be taking so that means you get a lot more depreciation in the first years and what that leads to of course is that if you sell the property then you're going to have a gain because the fact that you have depreciation is going to lower the basis of the property so you're getting a benefit a tax right off of the depreciation so when you sell it then you're more likely to have a gain when you sell it and so then the question is well you took a deduction in the past and now you've got and now you're selling it and actually the value of the property didn't really go down so that's where you come up with this recapture of the depreciation concept that has to come into play a listed property if your business use a listed property explained in chapter 8 under depreciation falls into 50% or less in a tax year after the tax year you place the property in service you may have to recapture part of the depreciation deduction you do this by including in income on schedule C part of the depreciation you deducted in previous years you can use part number 4 of form 4797 to figure the amount to include in schedule C for more information see what is business use requirement in chapter 5 of publication 946 so you can take a look at that to dive into this in more detail that chapter explains how to determine whether property is used more than 50% in business in your business section 179 property now section 179 is usually one of the things that the tax code will use to kind of accelerate the depreciation that you could take in year 1 generally when you purchase the property which of course leads to over depreciating from an accounting standpoint which would lead to the fact that if you sold the property you would most likely have a gain because you now have a lower adjusted basis so if you take a section 179 deduction explained in chapter 8 under depreciation for an asset and before the end of the assets recovery period the percentage of business use drops to 50% or less you must recapture part of the section 179 deduction so now you're talking about business versus personal use it drops under and so now you've got to basically a problem with the deduction that was taken under the 179 deduction which can be of course quite significant you do this by including an income on schedule C part of the deduction you took use part number 4 of form 4797 to figure the amount to include in schedule C you can see chapter 2 of publication 946 in that case sale or exchange of depreciable property so now you're going to sell the property and like I say when you sell the property because of the accelerated depreciation it's likely that you'll have a gain so then when you have the gain that should kind of net out you would think then against the accelerated expenses that you were able to take the deductions you were able to take for depreciation because that lowered the basis or adjusted cost in essence of the property so if you sell or exchange depreciable property at a gain you may have to treat all or part of the gain due to depreciation as ordinary income so this is the issue this is where it comes so you would think you would all work itself out because you're saying okay I got a depreciation in the early years because the tax code incentivized that and then I sold the property but because I had a lower basis due to the depreciation I took the book value in essence from an accounting standpoint or adjusted basis from the stock from the tax standpoint is lower that means that I had a gain so it kind of washes out I got a deduction prior year I've got to record income in the following year but if you have this difference in tax rates then that causes problems if you got capital gains rates versus ordinary income rates that could cause a problem because if the deduction was taken using against the ordinary income rates then you would be incentivizing people to kind of cheat the system by basically purchasing stuff getting a deduction on ordinary income rates and then selling it and getting the income that they have to record but it's recorded at the favorable capital gains rates and that would be a problem so that's when it gets kind of messy so you figure the income due to depreciation recapture in part 3 of form 4797 so for more information on that you can see chapter 4 of publication 544