How a Sole Proprietorship is Taxed

Articles In This Section:

· Form of business and financing

· BUSINESS ADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS DISADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS FINANCING

· WHAT TYPES OF BUSINESS LOANS

· LOANS FOR THE BUSINESS

· A LINE OF CREDIT FOR THE BUSINESS

· How a Sole Proprietorship is Taxed

· BUSINESS ADVANTAGES OF THE PARTNERSHIP FORM

· BUSINESS DISADVANTAGES OF THE PARTNERSHIP FORM

· THREE RULES AS BUSINESS PARTNERS

· BUSINESS TAXATION

· BUSINESS CORPORATION

· BUSINESS DISADVANTAGES OF THE CORPORATE FORM

· BUSINESS CORPORATE FINANCING

· BUSINESS STOCKHOLDER ELECTION TO REPORT CORPORATE INCOME

· MAKING THE BUSINESS ELECTION

· HOW THE BUSINESS ELECTION IS LOST

· BUSINESS ADVANTAGES AND DISADVANTAGES OF STOCKHOLDER REPORTING OFCORPORATE INCOME

A sole proprietor's business operations are considered an integral part of the owner's activities. The tax law does not treat a proprietorship as a separate taxpayer or even as a separate tax reporting unit. The income of a proprietorship is included as part of all the income earned by the proprietor. But although the proprietorship is neither a separate tax-paying nor tax-reporting unit, the proprietor's business income is figured separately from his other income. Business income is reported on a separate schedule, called Schedule C, that accompanies the individual tax return, Form 1040. The resulting net profit (or loss) is then added (or subtracted from as the case may be) the proprietor's other income. When a sole proprietor's business losses exceed his other income, he can carry back the loss as a net operating loss deduction against income of three prior years. If the loss is not eliminated by the income of the prior years, then the remaining loss can be carried forward as deduction against income of five later years. A loss applied to previous years gives a refund of back taxes. A loss applied to later years reduces taxes for those years. Example: In 1961 a sole proprietor suffers a business loss of $65,000. His nonbusiness income is $5,000. He now has a net operating loss of $60,000 which he can deduct from the income of the following years:

PERSONAL TAX

YEAR	INCOME	DEDUCTION	TAX RESULT
1958	$10,000	$10,000	Tax refund
1959	$7,500	$7,500	Tax refund
1960	$8,500	$8,500	Tax refund
1962	$5,000	$5,000	No tax due
1963	$,000	$6,000	No tax due
1964	$8,000	$8,000	No tax due
1965	$10,000	$10,000	No tax due
1966	$12,500	$5,000	Tax reduction

PARTNERSHIP

An acceptable definition of a partnership is an agreement between two or more persons to carry on a business for a purpose and for profit. Read through the following lists containing the advantages and disadvantages of this form of business enterprise. Check these lists against your own factual circumstances in order to determine whether this form of operation is best for you.