Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

Explain ordinary business income and separately stated items. Give some examples and explain why they are separately stated.

Answer 1

ORDINARY BUSINESS INCOME

Ordinary business income includes any earnings your company makes through daily operations. Profit from selling a product or providing a service is called ordinary business income.You need to keep track of your ordinary business income for tax purposes. It is important to trackl business income separate from personal income.

Business income can be positive or negative. If you have positive ordinary income , you are earning more than you are spending. If you have negative business income , you are earning less than you are spending.

Ordinary income comes from day to day business operations, excluding income gained from selling capital assests.

For private individual, ordinary income usually consists of the pretax salaries and wages they have earned.

SEPARATELY STATED ITEMS

Some items are considered to be ''separately stated''. Instead of affecting the income or expense of the entity, they are passed through to the owners separately.

separately stated items are the following;

1. gains and losses

2. net short term capital gains and losses

3. dividends

4. charitable contribution

5. taxes paid to a foreign country

6. investment income and expenses

7. real estate income and expenses

8. non deductable expenses , such as 50% of meals and entertainment expenses.

For example: if the owner the firm X makes a charitable contribution of $300, then it is not deducted from the income of firm but it is separately deducted from owners account because it is a separately stated item.