CARL WATTS & ASSOCIATES
September 07, 2015
|
Washington DC
|
tel/fax 202 350-9002 |
|
This seems to be a pretty simple topic, after all business income is just a kind of income that you must report and pay taxes on, right? Of course! But what types of income does this term actually cover?
|
|
|
|
No matter how familiar you may be with the term as a business owner, independent contractor, or just a knowledgeable taxpayer, it is our task to better inform you what business income is considered to be from the IRS point of view.
|
|
Basically, if there is a connection between any income you receive and your business, the income is 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 must report on your tax return all income you receive from your business unless it is excluded by law. In most cases, your business income will be in the form of cash, checks, and credit card charges.
Your business may be organized as a sole proprietorship, partnership or corporation. A sole proprietorship is an unincorporated business owned by an individual. A sole proprietorship has no existence apart from its owner. Business debts are personal debts of the owner. A limited liability company (LLC) owned by one individual is treated as a sole proprietorship for federal income tax purposes, unless the owner elects to treat the LLC as a corporation. A sole proprietor files Schedule C, Profit or Loss from Business (Sole Proprietorship), or Schedule C-EZ, Net Profit From Business, to report the income and expenses of the business and reports the net business earnings on Form 1040, U.S. Individual Income Tax Return. |
|
|
|
A partnership is an unincorporated business organization that is the result of two or more persons joining to carry on a trade or business, a financial operation or venture. Each person contributes money, property or services in return for a right to share in the profits and losses of the partnership. An LLC with more than one owner is treated as a partnership for tax purposes, unless the LLC elects to be treated as a corporation. A partnership reports its income and expenses on Form 1065, U.S. Return of Partnership Income. The partnership does not itself pay income tax. Each partner receives a Form 1065, Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., that indicates the partner's distributive share of partnership income, expenses and other items, determined in accordance with the terms of the partnership agreement. Partners report on their income tax returns the amounts reported on the Schedule K-1.
|
|
|
 |
|
The term corporation, for federal income tax purposes, generally includes a legal entity separate from the persons who formed it under federal or state law or the shareholders who own it. It also includes certain businesses that elect to be taxed as a corporation by filing Form 8832, Entity Classification Election. Corporations report their income and expenses, and calculate their tax on Form 1120, U.S. Corporation Income Tax Return.
|
|
Business income may include income received from the sale of products or services. For example, fees received by a person from the regular practice of a profession are business income. Rents received by a person in the real estate business are business income. A business must include in income payments received in the form of property or services at the fair market value of the property or services.
|
|
|
|
Bartering, for instance, is an exchange of property or services. You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise.
|
|
|
|
If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C or C-EZ. If you are not a real estate dealer, report the rental income and expenses on Schedule E.
|
|
|
| Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. |
|
|
Business Income
|
Troubles viewing this message? View in browser online here
|
| An example of a service that is not normally provided for the convenience of the occupants is maid service. However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. |
| If you are in the business of renting personal property (equipment, vehicles, formal wear, etc.), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. |
| Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Interest received on loans is business income if you are in the business of lending money. |
|
If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. |
|
If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. |
|
Generally, dividends are business income to dealers in securities. For most sole proprietors and statutory employees, however, dividends are nonbusiness income. If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. |
|
If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return.
 |
| Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. |
|
Royalty income you receive on property that you produce as part of your business (for instance, if you're a freelance writer and you receive royalties on a book you wrote) would be considered business income to be reported on Schedule C. But if you receive royalty payments on property you purchased or inherited, the payments should instead be reported on Schedule E, Supplemental Income and Loss. |
|
|
|
If you receive compensation because of a breach of contract or fiduciary duty, patent infringement, or antitrust injury, the amounts must be included in your gross business income. This rule applies to punitive damages as well. You may be entitled to a deduction against this income for legal fees and other expenses you had to pay in order to recover the amounts. |
| There are a number of items that you might think of as business income, but which are not considered taxable income by the IRS., such as: |
|
|
|
|
|
|
|
|
|
 |
| As it is usually the case, there are exceptions to what is or is not considered business income for almost every occupation, so it is highly recommended that you enroll help from a professional to make sure that you include the right type of income on your tax return and do not pay more taxes than you should. |