What is Business Income?

Small Business Accounting – Business income is income received for products or services sold. For example, fees paid to a professional person are considered business income. Rents paid to a person in the real estate business are business income. Payments received in the form of property or services must be included in income at their fair market value.

Normally a business is organized as either a sole proprietorship, partnership, or corporation. A sole proprietorship is the simplest form of business organization. It has no existence apart from its owner. Business debts are personal debts of the owner. As a sole proprietor, you file Form 1040 Schedule C, or Form 1040 Schedule C-EZ, with Form 1040, to report the profit or loss from your business. Also, you must file Form 1040 Schedule SE if you had net earnings (from Schedule C or C-EZ) of $400 or more or had church employee income of $108.28 or more. Schedule SE is used to figure self-employment tax, which is the combined social security and Medicare tax on self-employment income.

A partnership is an unincorporated business organization that is the result of two or more persons joining together to carry on a trade or business. Each person contributes a combination of money, property, labor, or skills, and each expects to share in the profits and losses. A limited liability company with more than one owner is generally treated as a partnership for tax purposes. A partnership’s income and expenses are generally reported on Form 1065, an annual information return. No income tax is paid by the partnership itself. Each partner receives a Form 1065 Schedule K-1, which generally allocates the income and expenses among the partners according to the terms of the partnership agreement.

A corporation, for Federal income tax purposes, generally includes a business formed under Federal or state laws that refer to it as a corporation, body corporate, or body politic. It also includes certain businesses that elect to be taxed as a corporation by filing Form 8832. The owners of a corporation are the shareholders. The tax on a corporation’s income is figured on Form 1120 or Form 1120A. For more information on corporations in general, refer to Publication 542, Corporations. Corporations that meet certain requirements may elect to become S corporations, which are treated in a manner similar to partnerships. An S corporation files Form 1120S, and generally does not pay tax on its income. Most income and expenses are “passed through” to the shareholders on Form 1120S Schedule K-1. These amounts are to be included on the shareholders’ individual returns.

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