What is Business Income
Do you know how you can identify business income and determine if it’s taxable? Business income is any compensation you receive that’s connected with a business.
Getting a share of business income and how you can specifically identify them can be a challenge. We can shed light on your questions here.
Business income is money that is generally received from the sale of services and products. For instance, it includes rents received by people in real estate businesses or even fees received by professional people. It even includes other payments in the form of goods or services in exchange for another.
Identifying Business Income
Traditional forms of business income refer to cash, credit cards, or checks. However, business income may also be in service or property forms. Other examples of this type of income include interest and dividends, real estate rents, bartering, damages, cancelled debt, or even kickbacks.
Now, other income that do not fall into the business income category involves inheritances and gifts as well as other fringe benefits given to you for free. For business owners, return of capital is also not included as a business income. This is just recovering your investment and no profit has been made when you do.
Determining Taxable Business Income
Considering a few exclusions above, almost all income are taxable. The IRS (Internal Revenue Service) definitely taxes individual’s income from their work or job. At the same token, it also taxes the income that businesses bring in. And if individuals can lower their taxable income through deductions and credits, then businesses can absolutely do so as well.
Here are the types of taxable business income according to the IRS:
- Constructive Income – as soon as property or money is available to you or credited to your account but you did not take advantage of it for some reason, it should still be taxed. For example, you’ve had a check for this year and you held it for deposit until next year, it should be declared on the year it was received.
- Goods and Services – this is not just in the form of money. If you barter or exchange goods and services with your customers, the fair market value of the service or item should still be included in your tax report as business income.
- Worldwide Income – the Americans are taxed on this type of income no matter if they earned it outside the United States. The only exception is if they reside in that country most of the time in a particular year.
- Illegal Income – IRS does not care how you earn your living. Even as a hitman or a gambler, you should still be able to report your business income. Remember that anything of value coming from your business is considered as business income. You should declare all of them as taxable except if they were given to you without any profit or sale.
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