Tax Topics - Topic 108 Business Income

Tax Topics Home > Topic 108 Business Income

Business Income

Business income is income received from the sale of products or services. For example, fees received by a professional person are considered business income. Rents received by 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 a sole proprietorship, partnership, or corporation. A sole proprietorship has no existence apart from its owner. Business debts are personal debts of the owner. A sole proprietor files Form 1040 Schedule C, or Form 1040 Schedule C-EZ, (with Form 1040), to report the income and expenses of the business. A sole proprietor who had net earnings (from Schedule C or C-EZ) of $400 or more or had church employee income of $108.28 or more must file Form 1040 Schedule SE. 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 money, property, services, or a combination thereof in return for a right to share in the profits and losses of the partnership. 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, U. S. Return of Partnership Income, annually. No income tax is paid by the partnership itself. Each partner receives a Form 1065 Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., which indicates the partner's distributive share of partnership income, expenses, and other items, determined in accordance with the terms of the partnership agreement. For more information, refer to Form 1065 Instructions. For more information on partnerships, in general, refer to Publication 541, Partnerships.

The term "corporation", for Federal income tax purposes, generally includes legal entities separate from the people who formed them under Federal or state law or the shareholders who own them. It also includes certain businesses that elect to be taxed as a corporation by filing Form 8832, Entity Classification Election. The tax on a corporation's income is figured on Form 1120, U. S. Corporation Income Tax Return. Form 1120-A is now obsolete for tax years beginning in 2007. 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, U. S. Income Tax Return for an S Corporation, and is generally not subject to tax. Most income and expenses of an S corporation are "passed through" to the shareholders on Form 1120S Schedule K-1, Shareholder's Share of Income, Deductions, Credits, etc. The shareholders include the amounts indicated on the K-1 on their individual returns.

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