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A Primer in Taxable Business Income

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A Primer in Taxable Business Income

Published: December 16, 2009

No one says that doing your taxes is easy, but being prepared when tax season comes can make the process less painful. When filing your business income taxes, you must report all income - not just income from the sale of goods, services, or property. For small business owners, taxable income falls into a few major categories. The following list is by no means comprehensive, but it provides an easy-to-read reference on taxable income on your small business.

Business Entities: Business investment income is payment associated with the procedures and processes of running and managing your business. You must report income, losses, deductions, and credits of its partners (in a partnership) and shareholders (in an S-Corp). The IRS offers details about entity reporting requirements:

To learn more about business structures, check out our business incorporation guide or read our blog about differences in business structures.

Rental Income: Rental income includes the rental of equipment and vehicles. If the primary purpose of rental activity is for income or for profit and you regularly engage in renting, it will likely be classified as a business activity. You can see IRS Publication 535 for more details.

Royalties: Royalties from copyrights and patents are taxable. Literary, musical, or artistic works are generally taxed based on the number of units sold. Intellectual property, which includes patents and copyrights. Royalties from the sale of natural resources can also be taxed, usually in terms of units (barrels, tons, etc). The tax generally applies to the amount you receive when the resources are extracted from your property. The IRS notes there are special rules for coal and iron ore.

Bartered Income: Bartering is the exchange of goods and/or services for other goods and/or services. For example, a daycare owner enrolls the child of a local web designer for free, and in exchange the web designer creates awebsite for the daycare. Even though money doesn't change hands, bartered income is taxable.

Remember, tax laws are always subject to change, so consult a small business accountant or the IRS to ensure that you have filed correctly.

Related Resources

Publication 525 (2008): Taxable and Non-Taxable Income

Tax Guide for Small Businesses

When does a Business Start Paying Taxes? A 101 in Small Business Tax Requirements

Message Edited by ChristineL on 12-18-2009 10:15 AM

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Wow..this is a great post. i'm a web designer and i've done the whole bartering thing multiple times to get so many other services that would have otherwise been unaffordable for me. I'll be writing a post about this website on my blog at gdsolutions.us and i hope you don't mind if i link to it. Thanks and keep on writing! ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
This is a very helpful post! A lot of small businesses and freelancers have no idea how their taxes might differ from other people's, and the barter income issue is relatively new to most. This post actually inspired me to write a post for PsPrint's blog about bartering, and I included a link back to this post for the tax info. No Money? No Worries With Bartering!'http://blog.psprint.com/small-business-marketing/no-money-worries-bartering/ 

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