Business income is income received when products or services are sold. For example, fees are business income to a professional person. Rents are business income to a person in the real estate business. Income received in the form of property or services must be included in income at its fair market value on the date received.

Normally a business is conducted as either a sole proprietorship, partnership, or corporation. A sole proprietorship is the simplest form of business organization. It has no existence apart from its owner. Business debts become personal debts of the owner. A sole proprietor files Schedule C, or Schedule C-EZ, with Form 1040, to report the profit or loss from the business. Also, Schedule SE, must be filed if you had net earnings (from Schedule C or C-EZ) of $400 or had church employee income of $108.28 or more. Schedule SE is used to figure the self-employment tax, which is the combined social security and Medicare tax on self-employment income. Select Topic 408 for more information on sole proprietorships, or order Publication 334, Tax Guide for Small Business.

A partnership is the relationship between two or more persons who join to carry on a trade or business. Each person contributes any combination of money, property, labor, or skills, and each expects to share in the profits and losses. A partnership's income and expenses are generally reported on Form 1065, an annual information return. No income tax is paid by the partnership itself. Each partner receives a Schedule K-1, Form 1065, which generally allocates the income and expenses among the partners according to the terms of the partnership agreement. For more information, order Publication 541, Partnerships.

A corporation, for federal income tax purposes, generally includes associations, joint stock companies, insurance companies, or trusts and partnerships that actually operate as associations or corporations. The owners of a corporation are the shareholders. The tax is determined on Form 1120, or Form 1120A . For more information on corporations in general, order Publication 542, Corporations. Corporations that meet the requirements may elect to become S corporations, which are treated in a manner similar to partnerships. An S corporation files Form 1120S, and generally does not pay tax on its income. Most income and expenses are "passed through" to the shareholders on Schedule K-1, Form 1120S, to be included on their individual returns. For more information, order the instructions for Form 1120S. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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