Tax Considerations
I always used to tell my clients, the IRS is like an owner in your business – It gets a cut of the profits too. How much of a cut can depend on the entity and of course the circumstances. I will talk about federal income tax and deductions in this section and save a brief discussion on self-employment taxes for the next section.
| Business Entity | Taxation |
|---|---|
| C-Corporation | Corporate Taxation IRC Sub. C |
| Partnership | Pass Through via IRC Sub. K |
| Limited Liability Company (LLC) | Pass Through via IRC Sub. K |
| Sole Proprietor | Owner |
| S-Corporation | Pass Through via IRC Sub. S |
Sole Proprietorships
Remember that sole proprietorships are not entities separate from their owners. As such, the owner reports all business-related tax items on their personal federal income tax Form 1040 and Schedule C “Profit or Loss From Business.” It is pretty straightforward and only two pages. Once the numbers are computed on the Schedule C, the bottom line – which is net profit or net loss – gets transferred to page one of the Form 1040 (in 2020, this was on line 3). Here is the income portion of the Schedule C.
Part I Income
| Tax Item # | Item Description | Tax Item Line # | Response Area for Tax Item |
|---|---|---|---|
| 1 | Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on From W-2 and the “Statutory Employee” box on that form was checked . . . . . . ☐ | 1 | – |
| 2 | Returns and allowances . . . . . . | 2 | – |
| 3 | Subtract line 2 from line 1 . . . . . . | 3 | – |
| 4 | Cost of goods sold (from line 42) | 4 | – |
| 5 | Gross profit. Subtract line 4 from line 3 | 5 | – |
| 6 | Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) | 6 | – |
| 7 | Gross income. Add lines 5 and 6 | 7 | – |
And part of the expenses portion:
Part II Expenses. Enter expenses for business use of your home only on line 30.
| Tax Item Line # | Tax Item description | Item # for Response | Response Area |
|---|---|---|---|
| 8 | Advertising . . . . . . | 8 | – |
| 9 | Car and truck expenses (see instructions) | 9 | – |
| 10 | Commissions and fees . . . . | 10 | – |
| 11 | Contract Labor . . . . . | 11 | – |
| 12 | Depletion . . . . . . | 12 | – |
| 13 | Depreciation and section 179 expense deduction (not included in Part III) (see instructions) | 13 | – |
| 14 | Employee benefit programs . . . | 14 | – |
| 15 | Insurance (other than health) . . . | 15 | – |
| 16 | Interest (see instructions) . . . . | 16 | – |
| 16a | mortgage (paid to banks, etc.) . . . | 16a | – |
| 16b | Other . . . . . . | 16b | – |
| 17 | Legal and professional services . . . | 17 | – |
| Tax Item Line # | Tax Item description | Item # for Response | Response Area |
|---|---|---|---|
| 18 | Office expense (see instructions) | 18 | – |
| 19 | Pension and profit-sharing plans | 19 | – |
| 20 | Rent or lease (see instructions) | 20 | – |
| 20a | Vehicles, Machinery, and e