Publication 334
taxmap/pubs/p334-014.htm#en_us_publink100025185This chapter primarily explains business income and how to account
for it on your tax return, what items are not considered income, and gives
guidelines for selected occupations.
If there is a connection between any income you receive and your
business, the income is business income. A connection exists if it is clear that
the payment of income would not have been made if you did not have the business.
You can have business income even if you are not involved in
the activity on a regular full-time basis. Income from work you do on the side
in addition to your regular job can be business income.
You report most business income, such as income from selling
your products or services, on Schedule C or C-EZ. But you report the income from
the sale of business assets, such as land and office buildings, on other forms
instead of Schedule C or C-EZ. For information on selling business assets, see
chapter 3.
 | Nonemployee compensation.
Business income includes amounts you received in your business that were
properly shown on Forms 1099-MISC. This includes amounts reported as nonemployee
compensation in box 7 of the form. You can find more information in the
instructions on the back of the Form 1099-MISC you received.
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taxmap/pubs/p334-014.htm#en_us_publink100025187You must report on your tax return all income you receive from
your business unless it is excluded by law. In most cases, your business income
will be in the form of cash, checks, and credit card charges. But business
income can be in other forms, such as property or services. These and other
types of income are explained next.
 | If you are a U.S. citizen who has business income from sources
outside the United States (foreign income), you must report that income on your
tax return unless it is exempt from tax under U.S. law. If you live outside the
United States, you may be able to exclude part or all of your foreign-source
business income. For details, see Publication 54, Tax Guide for U.S. Citizens
and Resident Aliens Abroad.
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taxmap/pubs/p334-014.htm#en_us_publink100025189Bartering is an exchange of property or services. You must include
in your gross receipts, at the time received, the fair market value of property
or services you receive in exchange for something else. If you exchange services
with another person and you both have agreed ahead of time on the value of the
services, that value will be accepted as the fair market value unless the value
can be shown to be otherwise.
taxmap/pubs/p334-014.htm#en_us_publink100025190You are a self-employed lawyer. You perform legal services for
a client, a small corporation. In payment for your services, you receive shares
of stock in the corporation. You must include the fair market value of the
shares in income.
taxmap/pubs/p334-014.htm#en_us_publink100025191You are an artist and create a work of art to compensate your
landlord for the rent-free use of your apartment. You must include the fair
rental value of the apartment in your gross receipts. Your landlord must include
the fair market value of the work of art in his or her rental income.
taxmap/pubs/p334-014.htm#en_us_publink100025192You are a self-employed accountant. Both you and a house painter
are members of a barter club, an organization that each year gives its members a
directory of members and the services each member provides. Members get in touch
with other members directly and bargain for the value of the services to be
performed.
In return for accounting services you provided for the house
painter's business, the house painter painted your home. You must include in
gross receipts the fair market value of the services you received from the house
painter. The house painter must include the fair market value of your accounting
services in his or her gross receipts.
taxmap/pubs/p334-014.htm#en_us_publink100025193You are a member of a barter club that uses credit units to credit
or debit members' accounts for goods or services provided or received. As soon
as units are credited to your account, you can use them to buy goods or services
or sell or transfer the units to other members.
You must include the value of credit units you received in your
gross receipts for the tax year in which the units are credited to your account.
The dollar value of units received for services by an employee
of the club, who can use the units in the same manner as other members, must be
included in the employee's gross income for the tax year in which received. It
is wages subject to social security and Medicare taxes (FICA), federal
unemployment taxes (FUTA), and income tax withholding. See Publication 15
(Circular E), Employer's Tax Guide.
taxmap/pubs/p334-014.htm#en_us_publink100025194You operate a plumbing business and use the cash method of accounting.
You join a barter club and agree to provide plumbing services to any member for
a specified number of hours. Each member has access to a directory that lists
the members of the club and the services available.
Members contact each other directly and request services to be
performed. You are not required to provide services unless requested by another
member, but you can use as many of the offered services as you wish without
paying a fee.
You must include the fair market value of any services you receive
from club members in your gross receipts when you receive them even if you have
not provided any services to club members.
taxmap/pubs/p334-014.htm#en_us_publink100025195If you are involved in a bartering transaction, you may have
to file either of the following forms.
- Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.
- Form 1099-MISC, Miscellaneous Income.
For information about these forms, see the General Instructions
for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and
W-2G).
If you are a real estate dealer who receives income from renting
real property or an owner of a hotel, motel, etc., who provides services (maid
services, etc.) for guests, report the rental income and expenses on Schedule C
or C-EZ. If you are not a real estate dealer or the kind of owner described in
the preceding sentence, report the rental income and expenses on Schedule E. For
more information, see Publication 527, Residential Rental Property (Including
Rental of Vacation Homes).
taxmap/pubs/p334-014.htm#en_us_publink100025197You are a real estate dealer if you are engaged in the business
of selling real estate to customers with the purpose of making a profit from
those sales. Rent you receive from real estate held for sale to customers is
subject to SE tax. However, rent you receive from real estate held for
speculation or investment is not subject to SE tax.
taxmap/pubs/p334-014.htm#en_us_publink100025198Rental income from a trailer park is subject to SE tax if you
are a self-employed trailer park owner who provides trailer lots and facilities
and substantial services for the convenience of your tenants.
You generally are considered to provide substantial services for tenants if they
are primarily for the tenants' convenience and normally are not provided to
maintain the lots in a condition for occupancy. Services are substantial if the
compensation for the services makes up a material part of the tenants' rental
payments.
Examples of services that are not normally provided for the tenants'
convenience include supervising and maintaining a recreational hall provided by
the park, distributing a monthly newsletter to tenants, operating a laundry
facility, and helping tenants buy or sell their trailers.
Examples of services that are normally provided to maintain the
lots in a condition for tenant occupancy include city sewerage, electrical
connections, and roadways.
taxmap/pubs/p334-014.htm#en_us_publink100025199Rental income you receive for the use or occupancy of hotels,
boarding houses, or apartment houses is subject to SE tax if you provide
services for the occupants.
Generally, you are considered to provide services for the occupants
if the services are primarily for their convenience and are not services
normally provided with the rental of rooms for occupancy only. An example of a
service that is not normally provided for the convenience of the occupants is
maid service. However, providing heat and light, cleaning stairways and lobbies,
and collecting trash are services normally provided for the occupants'
convenience.
taxmap/pubs/p334-014.htm#en_us_publink100025200Advance payments received under a lease that does not put any
restriction on their use or enjoyment are income in the year you receive them.
This is true no matter what accounting method or period you use.
taxmap/pubs/p334-014.htm#en_us_publink100025201A bonus you receive from a lessee for granting a lease is an
addition to the rent. Include it in your gross receipts in the year received.
taxmap/pubs/p334-014.htm#en_us_publink100025202Report payments you receive from your lessee for canceling a
lease in your gross receipts in the year received.
taxmap/pubs/p334-014.htm#en_us_publink100025203If your lessee makes payments to someone else under an agreement
to pay your debts or obligations, include the payments in your gross receipts
when the lessee makes the payments. A common example of this kind of income is a
lessee's payment of your property taxes on leased real property.
taxmap/pubs/p334-014.htm#en_us_publink100025204Payments you receive in settlement of a lessee's obligation to
restore the leased property to its original condition are income in the amount
that the payments exceed the adjusted basis of the leasehold improvements
destroyed, damaged, removed, or disconnected by the lessee.
taxmap/pubs/p334-014.htm#en_us_publink100025205If you are in the business of renting personal property (equipment,
vehicles, formal wear, etc.), include the rental amount you receive in your
gross receipts on Schedule C or C-EZ. Prepaid rent and other payments described
in the preceding
Real Estate Rents
discussion can also be received for renting personal property.
If you receive any of those payments, include them in your gross receipts as
explained in that discussion.
taxmap/pubs/p334-014.htm#en_us_publink100025206Interest and dividends may be considered business income.
taxmap/pubs/p334-014.htm#en_us_publink100025207Interest received on notes receivable that you have accepted
in the ordinary course of business is business income. Interest received on
loans is business income if you are in the business of lending money.
taxmap/pubs/p334-014.htm#en_us_publink100025208If a loan payable to you becomes uncollectible during the tax
year and you use an accrual method of accounting, you must include in gross
income interest accrued up to the time the loan became uncollectible. If the
accrued interest later becomes uncollectible, you may be able to take a bad debt
deduction. See
Bad Debts
in chapter 8.
If little or no interest is charged on an installment sale, you
may have to treat a part of each payment as unstated interest. See
Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales.
taxmap/pubs/p334-014.htm#en_us_publink100025210Generally, dividends are business income to dealers in securities.
For most sole proprietors and statutory employees, however, dividends are
nonbusiness income. If you hold stock as a personal investment separately from
your business activity, the dividends from the stock are nonbusiness income.
If you receive dividends from business insurance premiums you
deducted in an earlier year, you must report all or part of the dividend as
business income on your return. To find out how much you have to report, see
Recovery of items previously deducted under
Other Income,
later.
The following explains the general rule for including canceled
debt in income and the exceptions to the general rule.
taxmap/pubs/p334-014.htm#en_us_publink100025212Generally, if your debt is canceled or forgiven, other than as
a gift or bequest to you, you must include the canceled amount in your gross
income for tax purposes. Report the canceled amount on line 6 of Schedule C if
you incurred the debt in your business. If the debt is a nonbusiness debt,
report the canceled amount on line 21 of Form 1040.
taxmap/pubs/p334-014.htm#en_us_publink100025213The following discussion covers some exceptions to the general
rule for canceled debt.
taxmap/pubs/p334-014.htm#en_us_publink100025214If you owe a debt to the seller for property you bought and the
seller reduces the amount you owe, you generally do not have income from the
reduction. Unless you are bankrupt or insolvent, treat the amount of the
reduction as a purchase price adjustment and reduce your basis in the property.
taxmap/pubs/p334-014.htm#en_us_publink100025215You do not realize income from a canceled debt to the extent
the payment of the debt would have led to a deduction.
taxmap/pubs/p334-014.htm#en_us_publink100025216You get accounting services for your business on credit. Later,
you have trouble paying your business debts, but you are not bankrupt or
insolvent. Your accountant forgives part of the amount you owe for the
accounting services. How you treat the canceled debt depends on your method of
accounting.
- Cash method — You do not include the canceled debt in
income because payment of the debt would have been deductible as a business
expense.
- Accrual method — You include the canceled debt in income
because the expense was deductible when you incurred the debt.
For information on the cash and accrual methods of accounting,
see
chapter 2.
Do not include canceled debt in income in the following situations.
However, you may be required to file
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
For more information, see Form 982.
- The cancellation takes place in a bankruptcy case under title
11 of the U.S. Code (relating to bankruptcy). See Publication 908, Bankruptcy
Tax Guide.
- The cancellation takes place when you are insolvent. You can
exclude the canceled debt to the extent you are insolvent. See Publication 908.
- The canceled debt is a qualified farm debt owed to a qualified
person. See chapter 3 in Publication 225, Farmer's Tax Guide.
- The canceled debt is a qualified real property business debt.
This situation is explained later.
- The canceled debt is qualified principal residence indebtedness
which is discharged after 2006 and before 2013. See Form 982.
If a canceled debt is excluded from income because it takes
place in a bankruptcy case, the exclusions in situations 2 through 6 do not
apply. If it takes place when you are insolvent, the exclusions in situations 3
and 4 do not apply to the extent you are insolvent.
For purposes of this discussion, debt includes any debt for which
you are liable or which attaches to property you hold.
taxmap/pubs/p334-014.htm#en_us_publink100025219You can elect to exclude (up to certain limits) the cancellation
of qualified real property business debt. If you make the election, you must
reduce the basis of your depreciable real property by the amount excluded. Make
this reduction at the beginning of your tax year following the tax year in which
the cancellation occurs. However, if you dispose of the property before that
time, you must reduce its basis immediately before the disposition.
taxmap/pubs/p334-014.htm#en_us_publink100025220Qualified real property business debt is debt (other than qualified
farm debt) that meets all the following conditions.
- It was incurred or assumed in connection with real property
used in a trade or business.
- It was secured by such real property.
- It was incurred or assumed at either of the following times.
- Before January 1, 1993.
- After December 31, 1992, if incurred or assumed to acquire,
construct, or substantially improve the real property.
- It is debt to which you choose to apply these rules.
Qualified real property business debt includes refinancing of
debt described in (3) earlier, but only to the extent it does not exceed the
debt being refinanced.
You cannot exclude more than either of the following amounts.
- The excess (if any) of:
- The outstanding principal of qualified real property business
debt (immediately before the cancellation), over
- The fair market value (immediately before the cancellation)
of the business real property that is security for the debt, reduced by the
outstanding principal amount of any other qualified real property business debt
secured by this property immediately before the cancellation.
- The total adjusted bases of depreciable real property held
by you immediately before the cancellation. These adjusted bases are determined
after any basis reduction due to a cancellation in bankruptcy, insolvency, or of
qualified farm debt. Do not take into account depreciable real property acquired
in contemplation of the cancellation.
To make this election, complete Form 982 and attach it to your
income tax return for the tax year in which the cancellation occurs. You must
file your return by the due date (including extensions). If you timely filed
your return for the year without making the election, you can still make the
election by filing an amended return within 6 months of the due date of the
return (excluding extensions). For more information, see
When To File
in the form instructions.
taxmap/pubs/p334-014.htm#en_us_publink100025222The following discussion explains how to treat other types of
business income you may receive.
taxmap/pubs/p334-014.htm#en_us_publink100025223Restricted property is property that has certain restrictions
that affect its value. If you receive restricted stock or other property for
services performed, the fair market value of the property in excess of your cost
is included in your income on Schedule C or C-EZ when the restriction is lifted.
However, you can choose to be taxed in the year you receive the property. For
more information on including restricted property in income, see Publication
525, Taxable and Nontaxable Income.
taxmap/pubs/p334-014.htm#en_us_publink100025224Do not report on Schedule C or C-EZ a gain or loss from the disposition
of property that is neither stock in trade nor held primarily for sale to
customers. Instead, you must report these gains and losses on other forms. For
more information, see
chapter 3.
Report promissory notes and other evidences of debt issued to
you in a sale or exchange of property that is stock in trade or held primarily
for sale to customers on Schedule C or C-EZ. In general, you report them at
their stated principal amount (minus any unstated interest) when you receive
them.
taxmap/pubs/p334-014.htm#en_us_publink100025226If you reduce or stop your business activities, report on Schedule
C or C-EZ any payment you receive for the lost income of your business from
insurance or other sources. Report it on Schedule C or C-EZ even if your
business is inactive when you receive the payment.
taxmap/pubs/p334-014.htm#en_us_publink100025227You must include in gross income compensation you receive during
the tax year as a result of any of the following injuries connected with your
business.
- Patent infringement.
- Breach of contract or fiduciary duty.
- Antitrust injury.
You may be entitled to a deduction against the income if it compensates
you for actual economic injury. Your deduction is the smaller of the following
amounts.
- The amount you receive or accrue for damages in the tax year
reduced by the amount you pay or incur in the tax year to recover that amount.
- Your loss from the injury that you have not yet deducted.
You must also include punitive damages in income.
taxmap/pubs/p334-014.htm#en_us_publink100025230If you receive any kickbacks, include them in your income on
Schedule C or C-EZ. However, do not include them if you properly treat them as a
reduction of a related expense item, a capital expenditure, or cost of goods
sold.
taxmap/pubs/p334-014.htm#en_us_publink100025231If you recover a bad debt or any other item deducted in a previous
year, include the recovery in income on Schedule C or C-EZ. However, if all or
part of the deduction in earlier years did not reduce your tax, you can exclude
the part that did not reduce your tax. If you exclude part of the recovery from
income, you must include with your return a computation showing how you figured
the exclusion.
taxmap/pubs/p334-014.htm#en_us_publink100025232Joe Smith, a sole proprietor, had gross income of $8,000, a bad
debt deduction of $300, and other allowable deductions of $7,700. He also had 2
personal exemptions for a total of $7,300. He would not pay income tax even if
he did not deduct the bad debt. Therefore, he will not report as income any part
of the $300 he may recover in any future year.
taxmap/pubs/p334-014.htm#en_us_publink100025233This rule does not apply to depreciation. You recover depreciation
using the rules explained next.
taxmap/pubs/p334-014.htm#en_us_publink100025234In the following situations, you have to recapture the depreciation
deduction. This means you include in income part or all of the depreciation you
deducted in previous years.
taxmap/pubs/p334-014.htm#en_us_publink100025235If your business use of listed property (explained in chapter
8 under
Depreciation) falls to 50% or less in a tax year after the tax year you
placed the property in service, you may have to recapture part of the
depreciation deduction. You do this by including in income on Schedule C part of
the depreciation you deducted in previous years. Use Part IV of
Form 4797, Sales of Business Property, to figure the amount to include
on Schedule C. For more information, see
What is the Business-Use Requirement?
in chapter 5 of Publication 946, How To Depreciate Property. That chapter
explains how to determine whether property is used more than 50% in your
business.
taxmap/pubs/p334-014.htm#en_us_publink100025236If you take a section 179 deduction (explained in chapter 8 under
Depreciation) for an asset and before the end of the asset's recovery period
the percentage of business use drops to 50% or less, you must recapture part of
the section 179 deduction. You do this by including in income on Schedule C part
of the deduction you took. Use Part IV of Form 4797 to figure the amount to
include on Schedule C. See chapter 2 in Publication 946 to find out when you
recapture the deduction.
taxmap/pubs/p334-014.htm#en_us_publink100025237If you sell or exchange depreciable property at a gain, you may
have to treat all or part of the gain due to depreciation as ordinary income.
You figure the income due to depreciation recapture in Part III of Form 4797.
For more information, see chapter 4 in Publication 544, Sales and Other
Dispositions of Assets.
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