Entrepreneur Badge Challenge — 10 minutes
💰 The Big Idea
If you start a business, you need to think about taxes before you spend all the money you make.
Remember the income statement?
Revenue − Expenses = Net Income
In this activity, we’ll look at three different types of taxes:
💵 Income Tax — based on the business’s taxable income.
🛒 Sales Tax — collected from customers on taxable goods and then sent to the state.
🏦 Business Expenses — legitimate business expenses can reduce the income that is subject to income tax.
The exact rules depend on the type of business and where it operates. But one rule is universal for entrepreneurs:
Keep good records and plan for taxes!
That’s one reason your transaction journal is so important. Your accountant needs accurate records to prepare tax returns and financial statements.
🐦 The Challenge: Birdfood Express
It’s February, and your accountant has just given you the following income statement for Birdfood Express LLC.
| Birdfood Express LLC — Income Statement | Amount |
|---|---|
| Revenue | $35,000 |
| Bird food sales | $20,000 |
| Delivery services | $15,000 |
| Expenses | $25,000 |
| Net Income | ??? |
🧮 Round 1: How Much Did You Make?
Use some scratch paper for your results…
Calculate the net income:
Revenue − Expenses = Net Income
$35,000 − $25,000 = $________
Tell your group how you figured it out.
💸 Round 2: How Much Tax?
For this activity, we’re going to use made-up, simplified tax rules so you can see how the math works.
Federal Income Tax
| Net Income | Tax Rate |
| $1,000–$9,999 | 2% |
| $10,000–$19,999 | 10% |
| $20,000–$50,000 | 25% |
State Income Tax
| Net Income | Tax Rate |
| $1,000–$9,999 | 1% |
| $10,000–$19,999 | 3% |
| $20,000–$50,000 | 6% |
Sales Tax
For this activity, the state sales tax rate is:
6.875%
Only the bird food sales are subject to sales tax in our example.
🔎 Business Detective Challenge
Use some scratch paper to work out your answers…
1. Federal income tax
Net income × federal tax rate = $________
2. State income tax
Net income × state tax rate = $________
3. Sales tax
Bird food sales × 6.875% = $________
4. Total taxes
Add the three amounts together: $________
😲 Round 3: The $1 Question
Here’s where things get interesting. Suppose you discover one additional legitimate $1 business expense that you forgot to include in your records.
$25,000 expenses → $25,001
$10,000 net income → $9,999
Look at the simplified tax tables.
What happens to the tax rate?
Federal: 10% → 2%
State: 3% → 1%
🤔 Discuss:
How could finding just $1 of legitimate business expenses make such a big difference under these simplified rules?
Important: This example is designed to demonstrate how tax brackets can affect tax calculations. In the real world, tax systems generally don’t work exactly like these simplified tables.
🧾 Why Your Transaction Journal Matters
Now connect this activity to the previous badge. Imagine that the $1 expense was on a receipt you stuffed into your backpack but never recorded in your transaction journal.
Your accountant wouldn’t know about it.
That’s why entrepreneurs need to:
- Keep receipts
- Record transactions
- Keep records organized
- Give accurate information to the accountant
Your accountant can help calculate and report the taxes—but the accountant can only work with the information you give them.
🎯 What Entrepreneurs Should Remember
- Taxes aren’t something you should think about after you’ve spent all your money.
- A smart entrepreneur plans for them
- Revenue isn’t the same thing as profit.
- Profit isn’t the same thing as cash in your pocket.
- And some of that money may need to go toward taxes.
- Keep records → Know your income → Know your expenses → Plan for taxes
Note: This activity uses simplified, fictional tax rules for learning purposes. Actual federal, state, and local tax rules are more complicated and depend on factors such as business structure, taxable income, deductions, and location.