Joe Studio
Important: This is general U.S. federal tax information for education. Tax rules change, and your facts matter. For decisions (entity choice, payroll, major deductions), consult a CPA/EA or tax attorney.
1) What “individual business” usually means (for U.S. taxes)
Most people mean a business owned by one person (or a married couple) that reports tax on the owner’s personal return.
Sole proprietorship: (default if you start selling/doing work in your own name)
Single-member LLC (SMLLC): (a state-law entity; often disregarded for federal income tax)
Partnership / multi-member LLC: (files a partnership return)
S corporation: (corporation or LLC that elects S status)
C corporation: (separate tax-paying entity)
2) Core federal tax forms (high level)
Form 1040: Individual income tax return.
Schedule C (Form 1040): Business profit/loss for sole prop or disregarded SMLLC.
Schedule SE (Form 1040): Computes self-employment tax.
Form 1065: Partnership return (informational); owners get Schedule K-1.
Form 1120-S: S corporation return (informational); owners get Schedule K-1.
Form 1120: C corporation income tax return.
Forms 941/940/W-2/W-3: Payroll tax filings if you have employees.
Form 1099-NEC / 1099-MISC: Reporting certain payments to contractors/others.
Form 1040-ES: Estimated tax payment vouchers.
3) Key tax terms—definitions + practical guidelines
A. Income & receipts
Gross receipts / gross income
Definition: Total business money received (cash, checks, credit cards, online payments), before expenses.
Guideline: Track all deposits and sales platform reports; reconcile monthly.
Net profit (or net loss)
Definition: Gross receipts minus deductible business expenses.
Guideline: Net profit drives income tax and (for Schedule C) usually self-employment tax.
Cash vs. accrual accounting
Definition: Cash method: income when received; expenses when paid. Accrual method: income when earned; expenses when incurred.
Guideline: Many small businesses use cash method; inventory businesses may have special rules.
B. Business expenses & deductions
Ordinary and necessary (IRC §162)
Definition: Expenses common/accepted in your trade (ordinary) and helpful/appropriate (necessary).
Guideline: If you can explain why it helps you earn business income and it’s common for your line of work, it’s more likely to be deductible.
Deductible vs. non-deductible
Definition: Deductible reduces taxable income. Non-deductible examples include personal expenses, most fines/penalties, federal income taxes, and political contributions.
Guideline: When an expense is mixed personal/business, only the business portion is deductible.
Capital expense vs. current expense
Definition: Current expense: consumed within the year (supplies, routine repairs) → deducted now. Capital expense: asset with useful life beyond the year (equipment, computers) → depreciated/expensed under special rules.
Depreciation
Definition: Deduction spread over the asset’s useful life.
Guideline: Keep purchase date, cost, business-use %, and when placed in service.
Section 179 deduction
Definition: Allows expensing certain business property in the year placed in service (subject to limits).
Guideline: Great for profitable years; cannot create unlimited losses beyond certain limits.
Bonus depreciation
Definition: Additional first-year depreciation for eligible property (percent varies by year).
Guideline: Useful for large purchases; interacts with §179.
Start-up costs vs. organizational costs
Definition: Start-up: costs before operating (market research, advertising). Organizational: costs to form an entity (LLC legal filing, legal agreements).
Guideline: Often partly deductible and the rest amortized—keep these separate in your books.
Cost of Goods Sold (COGS)
Definition: Direct costs to produce/obtain products you sell (inventory purchases, manufacturing labor, freight-in).
Guideline: COGS reduces gross income; keep clean inventory records.
Inventory
Definition: Items held for sale or used in production.
Guideline: Track beginning inventory + purchases − ending inventory = COGS (simplified view).
C. Self-employment & payroll taxes
Self-employment (SE) tax
Definition: Social Security + Medicare taxes on net earnings from self-employment (generally Schedule C net profit).
Guideline: Set aside funds; many new owners underestimate this. You can deduct the “employer-equivalent” portion on your 1040.
FICA taxes
Definition: Social Security and Medicare taxes for employees (shared by employer and employee).
Guideline: If you have employees, you generally must withhold and remit and file payroll returns.
Reasonable compensation (S corporation concept)
Definition: S corp owner-employees must pay themselves a reasonable wage subject to payroll tax.
Guideline: Don’t pay $0 wages with large distributions—common audit issue.
D. Estimated taxes and withholding
Estimated tax payments
Definition: Quarterly payments toward income tax and SE tax when you don’t have enough withholding.
Guideline: Often due Apr 15, Jun 15, Sep 15, Jan 15 (dates may shift). Use last year’s safe harbor rules when applicable.
Underpayment penalty
Definition: Penalty/interest for paying too little tax during the year.
Guideline: Build a monthly set-aside habit (e.g., a dedicated savings account).
E. Entity terms
Disregarded entity (single-member LLC)
Definition: For federal income tax, the IRS ignores the LLC and treats activity as the owner’s (Schedule C), unless an election is made.
Guideline: You still have state-law liability protection features, but tax reporting looks like a sole prop.
Pass-through
Definition: Business income passes to owners’ returns (sole prop, partnership, S corp).
Guideline: Even if you leave cash in the business, you may still owe tax on profits.
Distributions vs. salary
Definition: Salary: wages subject to payroll tax. Distribution: owner draw/dividend-like payment; tax treatment depends on entity.
Guideline: In S corps, distributions are not wages—but you must pay reasonable wages first.
F. Home office, auto, travel
Home office deduction
Definition: Deduction for business use of your home if used regularly and exclusively as your principal place of business (or for certain administrative tasks).
Guideline: “Exclusive” is strict. Keep a floor plan or square footage calculation and evidence of business use.
Business mileage / auto expenses
Definition: Deduct business use of a vehicle by standard mileage rate or actual expenses.
Guideline: A contemporaneous mileage log is critical: date, destination, purpose, miles.
Travel vs. commuting
Definition: Commuting: home to regular work location → generally not deductible. Business travel: away from tax home overnight primarily for business → may be deductible.
Guideline: Document business purpose, itinerary, and receipts.
Meals
Definition: Business meals may be partially deductible (rules vary by year and context).
Guideline: Keep receipt + who/what/why (business purpose).
G. Contractors, 1099s, and workers
Independent contractor
Definition: Not an employee; typically controls how work is done.
Guideline: Misclassification creates payroll tax exposure. Use IRS and state tests.
Form 1099-NEC
Definition: Reporting certain payments (generally $600+) to non-employee service providers.
Guideline: Collect Form W-9 before paying; issue 1099s on time.
H. Banking & bookkeeping terms
Separate books and records
Definition: Organized documentation of income/expenses.
Guideline: Use a dedicated business checking/credit card when possible; keep digital copies of receipts.
Chart of accounts
Definition: Categories for bookkeeping (income, COGS, advertising, rent, etc.).
Guideline: Align categories to Schedule C lines if you’re a sole prop.
I. Common tax benefits
Qualified Business Income (QBI) deduction (IRC §199A)
Definition: Potential deduction up to 20% of qualified business income for certain pass-through owners, subject to limits.
Guideline: Depends on taxable income, business type, wages, and assets; plan before year-end.
Retirement plans (SEP-IRA, SIMPLE IRA, Solo 401(k))
Definition: Tax-advantaged retirement savings for self-employed.
Guideline: Strong way to reduce taxable income and save; deadlines and contribution limits apply.
Health insurance deduction (self-employed)
Definition: Eligible self-employed may deduct health insurance premiums (subject to rules).
Guideline: Coordinate with marketplace credits and employer coverage rules.
J. Sales tax (state/local—NOT federal)
Sales tax
Definition: State/local tax on retail sales of certain goods/services.
Guideline: Rules vary by state; “economic nexus” can require out-of-state collection.
4) Recordkeeping: what to keep and how long (practical)
Keep:
Income records: invoices, sales reports, 1099-K/1099-NEC, bank deposits
Expense proof: receipts, bills, statements, contracts
Asset records: purchase invoices, financing, depreciation schedules
Mileage logs and travel documentation
Payroll and contractor paperwork (W-4, I-9, W-9, timesheets)
Retention (common practice): At least 3–7 years depending on item; keep asset and entity formation records longer.
5) Year-round checklist (simple)
Monthly: Reconcile bank/credit cards, categorize income/expenses, save receipts (photo/PDF).
Quarterly: Estimate profit and pay estimated taxes if needed, review cash reserve for taxes.
Year-end: Check equipment purchases (179/bonus planning), review retirement contributions, issue W-2/1099s (collect W-9s early).
6) Fast “which entity should I be?” guide (very general)
Sole prop / SMLLC: Simplest; good when profit is modest and you want minimal admin.
S corporation: Can reduce SE taxes in some cases, but adds payroll, bookkeeping, and compliance.
Partnership: For 2+ owners; flexible but more complex.
C corporation: Usually for high-growth, reinvesting profits, or special planning; double-tax risk.
7) Questions to tailor this to you
What state are you in (sales tax and state income tax depend on this)?
What kind of business (services, products, online, rideshare, consulting, etc.)?
Do you have employees or contractors?
Roughly what are your annual gross receipts and net profit range?
Are you currently a sole prop/SMLLC/S corp/etc.?
Small Business Tax Guide: Advanced Rules & Elections
Important: This is general U.S. federal tax information for education. Tax rules change, and your facts matter. For decisions regarding specific code sections or elections, consult a CPA/EA or tax attorney.
Code Section Elections & Rules
83(b) election
Definition: A tax provision allowing employees who receive restricted stock or equity with vesting conditions to choose to recognize the income immediately upon grant rather than waiting for the restrictions to lapse. This accelerates the tax event based on the current valuation and simultaneously accelerates the employer's corresponding compensation deduction.
§179 expense
Definition: A tax incentive designed for small- to medium-sized businesses that permits an immediate deduction for the full cost of qualifying tangible personal property placed in service during the tax year, rather than capitalizing and depreciating it over time.
§197 intangibles
Definition: Acquired intangible business assets (such as goodwill, customer lists, or patents) that federal tax law mandates must be amortized evenly over a fixed period of 180 months (15 years), regardless of their actual or estimated useful life.
§291 depreciation recapture
Definition: A statutory rule requiring corporate taxpayers to reclassify a portion of their gain on the sale of real property from a capital gain (§1231 gain) into ordinary income, specifically targeting prior depreciation deductions claimed on the asset.
§338(g) election
Definition: A unilateral election made by a corporate purchaser who acquires 80% or more of a target corporation's stock, choosing to treat the transaction as an asset purchase for tax purposes to achieve a stepped-up basis in the assets.
§338(h)(10) election
Definition: A joint tax election made by both the corporate buyer and corporate seller of a subsidiary company's stock to treat the transaction as if the subsidiary sold all of its assets and then liquidated, providing tax advantages regarding asset basis.
§481 adjustment
Definition: A necessary calculation applied to a taxpayer's taxable income to account for variances and prevent items from being duplicated or omitted when a business transitions from one accounting method to another.
§704(b) capital accounts
Definition: The formal partner capital accounts are maintained strictly in accordance with Treasury Regulation Section 704(b), which dictates that accounts must reflect the true fair market value of property contributed to or distributed from a partnership.
§1231 assets
Definition: Depreciable property or real estate held for more than one year and utilized directly within a taxpayer’s trade or business. Profits on sales qualify for favorable capital gains treatment, while losses can often be treated as ordinary losses.
§1231 look-back rule
Definition: A tax compliance provision requiring taxpayers to treat current-year net §1231 gains as ordinary income to the extent that they claimed net §1231 ordinary losses during the preceding five tax years.
§1245 property
Definition: Broadly encompasses tangible and certain intangible personal property that has been subject to depreciation or cost recovery allowances, where any gain on sale must be recaptured as ordinary income up to the amount of prior depreciation taken.
§1250 property
Definition: Real property, such as commercial buildings and structural components, that is subject to cost recovery deductions and has specific, limited depreciation recapture requirements upon sale.
12-month rule
Definition: An administrative regulation allowing businesses to fully deduct prepaid operational expenses in the current tax year, provided the underlying economic benefit does not extend past 12 months and the contract period ends before the close of the subsequent tax year.
IRS Audit Timeline Letters
30-day letter
Definition: The preliminary notice issued by the IRS following a tax audit examination that provides the taxpayer with 30 days to either formally request an administrative appeal with an appeals officer or sign and agree to the proposed adjustments.
90-day letter
Definition: Officially known as the statutory notice of deficiency, this formal document is sent after an audit if no agreement was reached via the 30-day letter. It grants the taxpayer a strict 90-day window to either pay the assessed tax deficiency or file a formal petition in the U.S. Tax Court to dispute the findings.