IRS reminds small business/self-employeds about income reporting rules

The IRS has issued guidance to assist small business and self-employed (SB/SE) taxpayers “to better understand their reporting obligations.” In other words, small businesses and those self-employed are being warned that they better start reporting income properly. The IRS indicated that underreporting of business income by small businesses and others is a major source of the tax gap.

The guidance focuses on business income, gross receipts and cost of goods sold. The IRS stressed that all earned income is taxable, whether in the form of cash, credit, property, or services. Business income can also include canceled debt, damages and kickbacks.

Businesses that make or buy goods to sell may deduct the cost of goods sold from their gross receipts, the IRS explained. The cost of goods sold is determined by adding beginning inventory to purchases, labor costs, material and supplies, and other costs, and subtracting this total from ending year inventory.

Gross income equals net receipts minus of cost of goods sold. The IRS stated that gross income must be determined before deducting business expenses.

Record-keeping

The IRS strongly advises that small businesses should use a formal set of books and records and separate bank accounts for business and personal funds. The IRS provides the SB/SE One-Stop Resource, a web-based tool on the reporting and filing obligations of business, as well as a Small Business Workshop.

The IRS noted that good financial records can help a business seeking a loan or other capital. It also reminded small businesses and those self-employed that inadequate recordkeeping can cut both ways, contributing to over-reporting of taxable income and unintentional under-reporting.

(FS-2008-20)