This is Jean Wetzler.
I'm talking with Chris Wagner from the Small Business/Self-Employed division about business income.
Chris, what is business income and how do you determine if it's taxable?
If any income you receive is connected with the business, if it's clear the payment would not have been made if the business did not exist, then you have business income.
Business income is taxable.
Small business owners and self-employed taxpayers must report all income from their business unless the law specifically excludes it.
Are there certain types of payments that business owners should be aware of?
Of course, there are traditional forms such as cash, checks, and credit cards. But business income can also be in the form of property or services. Bartering, real estate rents, interest and dividends, cancelled debt, damages, or even kickbacks are a few examples of business income.
Directing payment through a third party does not remove the requirement to report the income and pay the tax. But there are business deductions? Yes, you can deduct business expenses, the cost of carrying on a trade or business.
There are several types. To be deductible, a business expense must be both ordinary - common and accepted in the line of work, and necessary - helpful and appropriate.
It's important to separate business expenses from other expenses; cost of goods sold, and capital and personal expenses.
How important is recordkeeping in all this?
Keeping good records is imperative.
Insufficient recordkeeping could cause a business owner to over report income and pay too much tax, or under report and pay too little.
There are benefits to having a formal set of books and records, accounting or financial software, and separate bank accounts for business and personal income and expenses.
What help does the IRS have for entrepreneurs?
Oh, our Website; it is a treasure trove of information and educational tools. If you start at IRS.gov/smallbiz (that's one word with a "z") and look for the section titled on line learning and educational products, you can view streaming video of a small business workshop, or order it on a DVD. We also have many other resources on our Website.
Thank you, Chris.
I've been talking with Chris Wagner of the IRS. This is Jean Wetzler.
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