Whether you’re a new business owner or your company has grown by leaps and bounds in recent years, it pays to be aware of business income strategies and tax planning. Our office regularly works with small business owners to help them define their best tactics for business income planning to ensure that your personal income and your company’s growth is protected as much as possible.
Defining Business Income
When it comes to business income, you can define it however you want, but at the end of the day, it’s really about what the IRS says, right? If they interpret something as qualifying for individual or business income tax rates, that’s the final say on these important topics. So you’ve got to educate yourself (or hand off that responsibility to a trusted tax strategy lawyer….hint hint) about the IRS interpretations so you can plan well ahead and have structures and documentation to support your decisions.
Gross income is the first and most important term to consider in this process. This is referenced in the U.S. tax code and therefore is the best basis from which to build an understanding of business income. The IRS says that gross income is “except as otherwise provided, this means all income from any source.”
Which, on the one hand, does truly define income, but it’s quite broad. That leaves the IRS a broad range of things under which they could classify a lot of things as gross income.
Income does not refer to cash sales alone, of course. It also includes property, services, or goods that have been received. Even if you barter to give something to someone else in exchange for another item or service, you still have to consider that as part of your business income. In general, the best rule of thumb is that anything your business or you receive is income unless it is otherwise classified as an exception. To get into the specifics, you’ll want to have both a CPA and a knowledgeable tax attorney to help you.
So just what are those exclusions? Gifts and inheritances fall outside of the typical classification of income, for one. However, winning the lottery does not mean that’s a “gift”, of course. You’re going to pay taxes on that. One other common exclusion that comes up for most business owners is some of the benefits that are provided to employees or owners as a result of being affiliated with the company.
Other Kinds of Income
Goods, property, and services are definitely sources of income and value when it comes to tax determination. But it doesn’t stop there, and this is why business tax strategy can be so complex to prompt you to speak with an attorney. Things like “constructive receipt” include anything that you ave the right to put your hands on- this means property that is available to you or credited to your account. As soon as it becomes available, it’s considered income for you.
Of course, the IRS wants you to pay your taxes on income no matter how it was received. This means that any illegal income should be included on your tax return, too. Bear in mind that there have been many cases, including Al Capone, that ended with an audit revealing hidden illegal income.
If you earn income abroad or live abroad but are still a U.S. citizen, that’s income, too. In certain situations you could exclude this income, but you’ll want to have this conversation with a U.S.-based tax strategist or attorney to determine whether income from abroad or all income you receive while living abroad really counts.
Finally, return of capital is another form of business income. As most company owners know, when you sell an asset it’s about the level of appreciation that’s occurred since the time of original purchase. Deciding when to sell in that case can be a bit of a strategy for sure, so rely on the help from outside professionals to assist you with the proper timing of an asset that might be hit with capital gains taxes.
Ready to talk options? Set up a time to talk through your strategy with a tax lawyer today.