Tax Guide
Once you have added up all your gross business income, and you've dug up all yourdeductible business expenses for theyear, you can calculate your net business income by subtracting yourexpenses from your income. Hopefully, you still have some incomeleft over after expenses are deducted! This amount is your net profitfor tax purposes.
For sole proprietors, the net profit calculationis made on the bottom of the front page of your Schedule C or on Line3 of your C-EZ. If you have more than one Schedule C, the resultsfrom each one are computed separately. The results from any and allSchedule Cs you have are totaled up and carried over to your individualincome tax return (Form 1040, Line 12), where they will become partof your adjusted gross income (AGI). If you are filing jointly withyour spouse, the net income from any Schedule Cs filed by your spouseis also included.
There are three more important issues todeal with in conjunction with computing your net profit for the year:
- Self-employment taxes - for soleproprietors, your net business income is the amount on which you mustpay self-employment taxes. So, your net business profit or loss isalso carried over to Line 2 of Schedule SE, which is used to computeyour self-employment (SECA) tax. If your business is a partnership,LLC, or corporation, you must follow somewhat different rules.
- Additional medicare tax on wagesand self-employment income over applicable thresholds.
- Net operating losses - owning a businessis full of surprises, both good and bad. In some years you may findthat your expenses exceed your gross business income, which meansthat you have a loss for the year. You may be able to deduct thisloss against any other income you or your spouse may have, or carryit over to other years in which you have more income, provided youmeet certain requirements.
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