Tax Challenges for Business Income - Part I

Understated business income...the IRS says this is becoming more and more prevalent especially in small businesses. Are more and more small business owners trying to cheat the IRS out of tax dollars? The IRS thinks it is more likely to be the lack of knowledge on the part of small business owners of just how to calculate and document gross business income. Here are some helpful tips from the IRS to help out those who struggle with this on their tax returns.

First of all, what is business income? Business income is any and all income associated with a business. If there is any connection between the income and a business it is business income. You can answer that question with another one...if the business did not exist would the income have been received? If you can answer that with "yes," then put it in the business income column. As a business owner you are legally required to report ALL income that is derived from your business.

There are numerous ways to receive business income. Typically, the income is from simple forms of payment such as cash, checks or credit cards. However, trades, bartering, exchanging of services, exchanging of property are additional ways of paying for the goods and services provided by a company. All of these are considered taxable as sources of income. This leads us into Cost Of Goods Sold (COGS) where businesses will sell products in order to trade for services needed. This is where a lot of things are not as "black and white" on the business income spreadsheet. Next week we will continue with this topic and get into how to actually calculate gross business income though these types of sources.