Business income is income that is received from the sale of products and services. Business income can include fees paid to a person for their services provided through their regular business, as well as rents received from real estate. Businesses must report all income received as property or services at the cost of the fair market value of the property or services rendered.

Businesses can be classified as one of three organizations: a sole proprietorship, a partnership, or a corporation.

• Sole Proprietorship: a business that is not incorporated and is owned by an individual. Without the owner, the business does not exist, and all debts of the business are also personal debts belonging to the owner. The IRS treats limited liability companies (LLC) as sole proprietorships for income taxes, as long as they are owned by a single individual. The owner can opt to have their LLC treated as a corporation if they wish. These businesses file Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ, Net Profit from Reporting income and expenses from business are necessary at tax time. Sole proprietors with great than $400 of net earnings have to file a Schedule SE, Self-Employment Tax, to determine the total of Social Security and Medicare taxes owed on the income.
• Partnership: an organization that requires the joint venture of two or more persons to carry out business, trade, or financial operations. Partnerships are not incorporated. Each person in the business is responsible for adding money, property or services to the business in exchange for rights to profit shares and losses. An LLC with two or more owners is treated as a partnership, unless the owners have opted to be taxed as a corporation. Partnerships file Form 1065, U.S. Return of Partnership Income, to report all income. The entire entity doesn’t pay income tax, but each partner pays a distributive share of the tax, and report the amount shown on their Form 1065 Schedule K-1, on their individual returns.
• Corporation: a legal entity separate from the owners and operators, as well as the shareholders. Corporations can include businesses that opt to be taxed as such, like the aforementioned LLCs. Corporations must report all income and expenses by filing a Form 1120, U.S. Corporation Income Tax Return. There are certain regulations that must be met if a corporation wishes to be taxed as a subchapter S corporation. S corporations typically get taxed in the same method as partnerships, where regular income tax is not applied. S corporation income tax is applied to shareholders, of whom will report their specific tax amounts on their individual tax returns.