What Is Business Income?

Business income is a type of earned income and is classified as ordinary income for tax purposes. It encompasses any income realized as a result of an entity’s operations. In its simplest form, business income is an entity’s net profit or loss, which is calculated as its revenue from all sources minus the costs of doing business.

Key Takeaways

  • Business income is earned income and encompasses any income realized from an entity’s operations.
  • For tax purposes, business income is ordinary income.
  • Business expenses and losses often offset business income.
  • How a business is taxed depends on whether it is a sole proprietorship, partnership, or corporation.

Understanding Business Income

Business income is a term commonly used in tax reporting. According to the Internal Revenue Service (IRS), “Business income may include income received from the sale of products or services. For example, fees received by a person from the regular practice of a profession are business income. Rents received by a person in the real estate business are business income. A business must include in income payments received in the form of property or services at the fair market value of the property or services.”

Business expenses and business losses can offset business income. It can be either positive or negative in any given year. The profit motive behind business income is universal to most business entities. However, the way in which business income is taxed differs for each of the most common types of businesses: sole proprietorships, partnerships, and corporations. This means that how a business is formed determines which tax forms should be used to report business income to the IRS.

  • A sole proprietorship is not a legally separate entity from its owner. Therefore, business income from a sole proprietorship is reported on Form 1040, Schedule C, Profit or Loss from Business.
  • A partnership is an unincorporated business that is jointly held between two or more individuals. It reports business income on Form 1065. However, the partnership itself does not pay income tax. All partners receive a Schedule K-1 and report their share of the partnership’s income on their own individual income tax returns.
  • A corporation is a legally separate entity from any individual who owns it. Business income from a corporation is reported on Form 1120.

Business income coverage is a type of insurance that covers company losses due to a slowdown or temporary suspension of normal operations resulting from damage to a business’s physical property.

Special Considerations of Business Income

A business income coverage form is a type of property insurance policy that covers a company’s loss of income due to a slowdown or a temporary suspension of normal operations stemming from damage to its physical property. Let's say a doctor’s office in Florida is damaged in a hurricane. The doctor is unable to see patients in that office until the building is considered to be structurally sound again. The business income coverage would kick in during the time period when the doctor's business is interrupted.