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Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.

Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.

Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.

Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.

Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)

When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.

Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?

Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.

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• Write Your Business Plan | Part 1 Overview Video
• The Basics of Writing a Business Plan
• How to Use Your Business Plan Most Effectively
• 12 Reasons You Need a Business Plan
• The Main Objectives of a Business Plan
• What to Include and Not Include in a Successful Business Plan
• The Top 4 Types of Business Plans
• A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
• 6 Tips for Making a Winning Business Presentation
• 3 Key Things You Need to Know About Financing Your Business
• 12 Ways to Set Realistic Business Goals and Objectives
• How to Perfectly Pitch Your Business Plan in 10 Minutes
• Write Your Business Plan | Part 2 Overview Video
• How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
• How to Fund Your Business Using Banks and Credit Unions
• How to Fund Your Business With an SBA Loan
• How to Fund Your Business With Bonds and Indirect Funding Sources
• How to Fund Your Business With Venture Capital
• How to Fund Your Business With Angel Investors
• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• Write Your Business Plan | Part 3 Overview Video
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to Write an Income Statement for Your Business Plan Your income statement shows investors if you are making money. Here's everything you'll need to create one.

By Eric Butow Edited by Dan Bova Oct 27, 2023

Key Takeaways

• An income statement is your business's bottom line: your total revenue from sales minus all of your costs.

Opinions expressed by Entrepreneur contributors are their own.

This is part 2 / 11 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the description of the business concept and the management team. Astute investors look carefully at the charts, tables, formulas, and spreadsheets in the financial section because they know that this information is like the pulse, respiration rate, and blood pressure in a human being. It shows the condition of the patient. In fact, you'll find many potential investors taking a quick peek at the numbers before reading the plan.

Related: How to Make Realistic Financial Forecasts

Financial statements come in threes: income statement, balance sheet, and cash flow statement. Taken together they provide an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward. This information is very important to business plan readers.

Why You Need an Income Statement

In his article, How to Do a Monthly Income Statement Analysis That Fuels Growth , Noah Parsons writes: "In short, you use your income statement to fuel a greater analysis of the financial standing of your business. It helps you identify any top-level issues or opportunities that you can then dive into with forecast scenarios and by looking at elements of your other financial documentation.

Related: How to Make a Balance Sheet

You want to leverage your income statement to understand if you're performing better, worse or as expected. This is done by comparing it to your sales and expense forecasts through a review process known as plan vs actuals comparison. You then update projections to match actual performance to better showcase how your business will net out moving forward."

What Is In an Income Statement

An income statement shows whether you are making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line.

Related: How to Make a Cash Flow Statement

Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives. They can get pretty complicated in their attempt to capture sources of income, such as interest, and expenses, such as depreciation. But the basic idea is pretty simple: If you subtract costs from income, what you have left is profit.

To figure out your income statement, you need to gather a bunch of numbers, most of which are easily obtainable. They include your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general, and administrative (SG&A) expenses; what you paid out in interest and dividends, if anything; and your corporate tax rate. If you have those, you're ready to go.

Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard

Sales and Revenue

Revenue is all the income you receive from selling your products or services as well as from other sources such as interest income and sales of assets.

Gross Sales

Your sales figure is the income you receive from selling your product or service. Gross sales equals total sales minus returns. It doesn't include interest or income from sales of assets.

Interest and Dividends

Most businesses have a little reserve fund they keep in an interest-bearing bank or money market account. Income from this fund, as well as from any other interest-paying or dividend-paying securities they own, shows up on the income statement just below the sales figure.

Related: How to Measure Franchise Success With Your Income Statement

Other Income

If you finally decide that the branch office out on County Line Road isn't ever going to turn a decent profit, and you sell the land, building, and fixtures, the income from that sale will show up on your income statement as "other income." Other income may include sales of unused or obsolete equipment or any income-generating activity that's not part of your main line of business.

Costs come in all varieties—that's no secret. You'll record variable costs, such as the cost of goods sold, as well as fixed costs—rent, insurance, maintenance, and so forth. You'll also record costs that are a little trickier, the prime example being depreciation.

Related: How to Use Financial Ratios to Understand the Health of Your Business

Cost of Goods Sold

Cost of goods sold, or COGS, includes expenses associated directly with generating the product or service you're selling. If you buy smartphone components and assemble them, your COGS will include the price of the chips, screen, and other parts, as well as the wages of those doing the assembly. You'll also include supervisor salaries and utilities for your factory. If you're a solo professional service provider, on the other hand, your COGS may amount to little more than whatever salary you pay yourself and whatever technology you may use for your business.

Related: My Company Hears Hundreds of Pitches Every Year — Here's What Investors Are Actually Looking For.

Sales, General, and Administrative Costs

You have some expenses that aren't closely tied to sales volume, including salaries for office personnel, salespeople compensation, rent, insurance, and the like. These are split out from the sales-sensitive COGS figure and included on a separate line.

Depreciation

Depreciation is one of the most baffling pieces of accounting wizardwork. It's a paper loss, a way of subtracting over time the cost of a piece of equipment or a building that lasts many years even though it may get paid for immediately.

Related: 10 Mistakes to Avoid When Pitching Investors (Infographic)

Depreciation isn't an expense that involves cash coming out of your pocket. Yet it's a real expense in an accounting sense, and most income statements will have an entry for depreciation coming off the top of pretax earnings. It refers to an ongoing decrease in asset value.

If you have capital items that you are depreciating, such as an office in your home or a large piece of machinery, your accountant will be able to set up a schedule for depreciation. Each year, you'll take a portion of the purchase price of that item off your earnings statement. Although it hurts profits, depreciation can reduce future taxes.

Paying the interest on loans is another expense that gets a line all to itself and comes out of earnings just before taxes are subtracted. This line doesn't include payments against the principal. Because these payments result in a reduction of liabilities—which we'll talk about in a few pages in connection with your balance sheet—they're not regarded as expenses on the income statement.

Related: How to Craft a Business Plan That Will Turn Investors' Heads

The best thing about taxes is that they're figured last, on the profits that are left after every other thing has been taken out. Tax rates vary widely according to where your company is located, how and whether state and local taxes are figured, and your special tax situation. Use previous years as a guidepost for future returns. If you are just opening your business, work carefully with your accountant to set up a system whereby you can pay the necessary taxes at regular intervals.

Buzzword: EBIT

EBIT stands for earnings before interest and taxes. It is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest.

Related: Don't Make This Huge Mistake on Your Financial Model

Important Plan Note

Don't confuse sales with receipts. Your sales figure represents sales booked during the period, not necessarily money received. If your customers buy now and pay later, there may be a significant difference between sales and cash receipts.

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

Free business plan templates and examples

Kickstart your business plan writing with one of our free business plan templates or recommended tools.

Free business plan template

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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How to create a business plan: examples & free template.

This is the ultimate guide to creating a comprehensive and effective plan to start a business . In today’s dynamic business landscape, having a well-crafted business plan is an important first step to securing funding, attracting partners, and navigating the challenges of entrepreneurship.

This guide has been designed to help you create a winning plan that stands out in the ever-evolving marketplace. U sing real-world examples and a free downloadable template, it will walk you through each step of the process.

Whether you’re a seasoned entrepreneur or launching your very first startup, the guide will give you the insights, tools, and confidence you need to create a solid foundation for your business.

Table of Contents

How to Write a Business Plan

Embarking on the journey of creating a successful business requires a solid foundation, and a well-crafted business plan is the cornerstone. Here is the process of writing a comprehensive business plan and the main parts of a winning business plan . From setting objectives to conducting market research, this guide will have everything you need.

Executive Summary

The Executive Summary serves as the gateway to your business plan, offering a snapshot of your venture’s core aspects. This section should captivate and inform, succinctly summarizing the essence of your plan.

It’s crucial to include a clear mission statement, a brief description of your primary products or services, an overview of your target market, and key financial projections or achievements.

Think of it as an elevator pitch in written form: it should be compelling enough to engage potential investors or stakeholders and provide them with a clear understanding of what your business is about, its goals, and why it’s a promising investment.

Example: EcoTech is a technology company specializing in eco-friendly and sustainable products designed to reduce energy consumption and minimize waste. Our mission is to create innovative solutions that contribute to a cleaner, greener environment.

Our target market includes environmentally conscious consumers and businesses seeking to reduce their carbon footprint. We project a 200% increase in revenue within the first three years of operation.

Overview and Business Objectives

In the Overview and Business Objectives section, outline your business’s core goals and the strategic approaches you plan to use to achieve them. This section should set forth clear, specific objectives that are attainable and time-bound, providing a roadmap for your business’s growth and success.

It’s important to detail how these objectives align with your company’s overall mission and vision. Discuss the milestones you aim to achieve and the timeframe you’ve set for these accomplishments.

This part of the plan demonstrates to investors and stakeholders your vision for growth and the practical steps you’ll take to get there.

Example: EcoTech’s primary objective is to become a market leader in sustainable technology products within the next five years. Our key objectives include:

• Introducing three new products within the first two years of operation.
• Achieving annual revenue growth of 30%.
• Expanding our customer base to over 10,000 clients by the end of the third year.

Company Description

The Company Description section is your opportunity to delve into the details of your business. Provide a comprehensive overview that includes your company’s history, its mission statement, and its vision for the future.

Highlight your unique selling proposition (USP) – what makes your business stand out in the market. Explain the problems your company solves and how it benefits your customers.

Include information about the company’s founders, their expertise, and why they are suited to lead the business to success. This section should paint a vivid picture of your business, its values, and its place in the industry.

Example: EcoTech is committed to developing cutting-edge sustainable technology products that benefit both the environment and our customers. Our unique combination of innovative solutions and eco-friendly design sets us apart from the competition. We envision a future where technology and sustainability go hand in hand, leading to a greener planet.

Define Your Target Market

Defining Your Target Market is critical for tailoring your business strategy effectively. This section should describe your ideal customer base in detail, including demographic information (such as age, gender, income level, and location) and psychographic data (like interests, values, and lifestyle).

Elucidate on the specific needs or pain points of your target audience and how your product or service addresses these. This information will help you know your target market and develop targeted marketing strategies.

Example: Our target market comprises environmentally conscious consumers and businesses looking for innovative solutions to reduce their carbon footprint. Our ideal customers are those who prioritize sustainability and are willing to invest in eco-friendly products.

Market Analysis

The Market Analysis section requires thorough research and a keen understanding of the industry. It involves examining the current trends within your industry, understanding the needs and preferences of your customers, and analyzing the strengths and weaknesses of your competitors.

This analysis will enable you to spot market opportunities and anticipate potential challenges. Include data and statistics to back up your claims, and use graphs or charts to illustrate market trends.

This section should demonstrate that you have a deep understanding of the market in which you operate and that your business is well-positioned to capitalize on its opportunities.

Example: The market for eco-friendly technology products has experienced significant growth in recent years, with an estimated annual growth rate of 10%. As consumers become increasingly aware of environmental issues, the demand for sustainable solutions continues to rise.

Our research indicates a gap in the market for high-quality, innovative eco-friendly technology products that cater to both individual and business clients.

SWOT Analysis

A SWOT analysis in your business plan offers a comprehensive examination of your company’s internal and external factors. By assessing Strengths, you showcase what your business does best and where your capabilities lie.

Weaknesses involve an honest introspection of areas where your business may be lacking or could improve. Opportunities can be external factors that your business could capitalize on, such as market gaps or emerging trends.

Threats include external challenges your business may face, like competition or market changes. This analysis is crucial for strategic planning, as it helps in recognizing and leveraging your strengths, addressing weaknesses, seizing opportunities, and preparing for potential threats.

Including a SWOT analysis demonstrates to stakeholders that you have a balanced and realistic understanding of your business in its operational context.

• Innovative and eco-friendly product offerings.
• Strong commitment to sustainability and environmental responsibility.
• Skilled and experienced team with expertise in technology and sustainability.

Weaknesses:

• Limited brand recognition compared to established competitors.
• Reliance on third-party manufacturers for product development.

Opportunities:

• Growing consumer interest in sustainable products.
• Partnerships with environmentally-focused organizations and influencers.
• Expansion into international markets.
• Intense competition from established technology companies.
• Regulatory changes could impact the sustainable technology market.

Competitive Analysis

In this section, you’ll analyze your competitors in-depth, examining their products, services, market positioning, and pricing strategies. Understanding your competition allows you to identify gaps in the market and tailor your offerings to outperform them.

By conducting a thorough competitive analysis, you can gain insights into your competitors’ strengths and weaknesses, enabling you to develop strategies to differentiate your business and gain a competitive advantage in the marketplace.

Example: Key competitors include:

GreenTech: A well-known brand offering eco-friendly technology products, but with a narrower focus on energy-saving devices.

EarthSolutions: A direct competitor specializing in sustainable technology, but with a limited product range and higher prices.

By offering a diverse product portfolio, competitive pricing, and continuous innovation, we believe we can capture a significant share of the growing sustainable technology market.

Organization and Management Team

Provide an overview of your company’s organizational structure, including key roles and responsibilities. Introduce your management team, highlighting their expertise and experience to demonstrate that your team is capable of executing the business plan successfully.

Showcasing your team’s background, skills, and accomplishments instills confidence in investors and other stakeholders, proving that your business has the leadership and talent necessary to achieve its objectives and manage growth effectively.

Example: EcoTech’s organizational structure comprises the following key roles: CEO, CTO, CFO, Sales Director, Marketing Director, and R&D Manager. Our management team has extensive experience in technology, sustainability, and business development, ensuring that we are well-equipped to execute our business plan successfully.

Products and Services Offered

Describe the products or services your business offers, focusing on their unique features and benefits. Explain how your offerings solve customer pain points and why they will choose your products or services over the competition.

This section should emphasize the value you provide to customers, demonstrating that your business has a deep understanding of customer needs and is well-positioned to deliver innovative solutions that address those needs and set your company apart from competitors.

Example: EcoTech offers a range of eco-friendly technology products, including energy-efficient lighting solutions, solar chargers, and smart home devices that optimize energy usage. Our products are designed to help customers reduce energy consumption, minimize waste, and contribute to a cleaner environment.

Marketing and Sales Strategy

In this section, articulate your comprehensive strategy for reaching your target market and driving sales. Detail the specific marketing channels you plan to use, such as social media, email marketing, SEO, or traditional advertising.

Describe the nature of your advertising campaigns and promotional activities, explaining how they will capture the attention of your target audience and convey the value of your products or services. Outline your sales strategy, including your sales process, team structure, and sales targets.

Discuss how these marketing and sales efforts will work together to attract and retain customers, generate leads, and ultimately contribute to achieving your business’s revenue goals.

This section is critical to convey to investors and stakeholders that you have a well-thought-out approach to market your business effectively and drive sales growth.

Example: Our marketing strategy includes digital advertising, content marketing, social media promotion, and influencer partnerships. We will also attend trade shows and conferences to showcase our products and connect with potential clients. Our sales strategy involves both direct sales and partnerships with retail stores, as well as online sales through our website and e-commerce platforms.

Logistics and Operations Plan

The Logistics and Operations Plan is a critical component that outlines the inner workings of your business. It encompasses the management of your supply chain, detailing how you acquire raw materials and manage vendor relationships.

Inventory control is another crucial aspect, where you explain strategies for inventory management to ensure efficiency and reduce wastage. The section should also describe your production processes, emphasizing scalability and adaptability to meet changing market demands.

Quality control measures are essential to maintain product standards and customer satisfaction. This plan assures investors and stakeholders of your operational competency and readiness to meet business demands.

Highlighting your commitment to operational efficiency and customer satisfaction underlines your business’s capability to maintain smooth, effective operations even as it scales.

Example: EcoTech partners with reliable third-party manufacturers to produce our eco-friendly technology products. Our operations involve maintaining strong relationships with suppliers, ensuring quality control, and managing inventory.

We also prioritize efficient distribution through various channels, including online platforms and retail partners, to deliver products to our customers in a timely manner.

Financial Projections Plan

In the Financial Projections Plan, lay out a clear and realistic financial future for your business. This should include detailed projections for revenue, costs, and profitability over the next three to five years.

Ground these projections in solid assumptions based on your market analysis, industry benchmarks, and realistic growth scenarios. Break down revenue streams and include an analysis of the cost of goods sold, operating expenses, and potential investments.

This section should also discuss your break-even analysis, cash flow projections, and any assumptions about external funding requirements.

By presenting a thorough and data-backed financial forecast, you instill confidence in potential investors and lenders, showcasing your business’s potential for profitability and financial stability.

This forward-looking financial plan is crucial for demonstrating that you have a firm grasp of the financial nuances of your business and are prepared to manage its financial health effectively.

Example: Over the next three years, we expect to see significant growth in revenue, driven by new product launches and market expansion. Our financial projections include:

• Year 1: $1.5 million in revenue, with a net profit of $200,000.
• Year 2: $3 million in revenue, with a net profit of $500,000.
• Year 3: $4.5 million in revenue, with a net profit of $1 million.

These projections are based on realistic market analysis, growth rates, and product pricing.

Income Statement

The income statement , also known as the profit and loss statement, provides a summary of your company’s revenues and expenses over a specified period. It helps you track your business’s financial performance and identify trends, ensuring you stay on track to achieve your financial goals.

Regularly reviewing and analyzing your income statement allows you to monitor the health of your business, evaluate the effectiveness of your strategies, and make data-driven decisions to optimize profitability and growth.

Example: The income statement for EcoTech’s first year of operation is as follows:

• Revenue: $1,500,000
• Cost of Goods Sold: $800,000
• Gross Profit: $700,000
• Operating Expenses: $450,000
• Net Income: $250,000

This statement highlights our company’s profitability and overall financial health during the first year of operation.

Cash Flow Statement

A cash flow statement is a crucial part of a financial business plan that shows the inflows and outflows of cash within your business. It helps you monitor your company’s liquidity, ensuring you have enough cash on hand to cover operating expenses, pay debts, and invest in growth opportunities.

By including a cash flow statement in your business plan, you demonstrate your ability to manage your company’s finances effectively.

Example:  The cash flow statement for EcoTech’s first year of operation is as follows:

Operating Activities:

• Depreciation: $10,000
• Changes in Working Capital: -$50,000
• Net Cash from Operating Activities: $210,000

Investing Activities:

•  Capital Expenditures: -$100,000
• Net Cash from Investing Activities: -$100,000

Financing Activities:

• Proceeds from Loans: $150,000
• Loan Repayments: -$50,000
• Net Cash from Financing Activities: $100,000
• Net Increase in Cash: $210,000

This statement demonstrates EcoTech’s ability to generate positive cash flow from operations, maintain sufficient liquidity, and invest in growth opportunities.

Tips on Writing a Business Plan

1. Be clear and concise: Keep your language simple and straightforward. Avoid jargon and overly technical terms. A clear and concise business plan is easier for investors and stakeholders to understand and demonstrates your ability to communicate effectively.

2. Conduct thorough research: Before writing your business plan, gather as much information as possible about your industry, competitors, and target market. Use reliable sources and industry reports to inform your analysis and make data-driven decisions.

3. Set realistic goals: Your business plan should outline achievable objectives that are specific, measurable, attainable, relevant, and time-bound (SMART). Setting realistic goals demonstrates your understanding of the market and increases the likelihood of success.

4. Focus on your unique selling proposition (USP): Clearly articulate what sets your business apart from the competition. Emphasize your USP throughout your business plan to showcase your company’s value and potential for success.

5. Be flexible and adaptable: A business plan is a living document that should evolve as your business grows and changes. Be prepared to update and revise your plan as you gather new information and learn from your experiences.

6. Use visuals to enhance understanding: Include charts, graphs, and other visuals to help convey complex data and ideas. Visuals can make your business plan more engaging and easier to digest, especially for those who prefer visual learning.

7. Seek feedback from trusted sources: Share your business plan with mentors, industry experts, or colleagues and ask for their feedback. Their insights can help you identify areas for improvement and strengthen your plan before presenting it to potential investors or partners.

FREE Business Plan Template

To help you get started on your business plan, we have created a template that includes all the essential components discussed in the “How to Write a Business Plan” section. This easy-to-use template will guide you through each step of the process, ensuring you don’t miss any critical details.

The template is divided into the following sections:

• Mission statement
• Business Overview
• Key products or services
• Target market
• Financial highlights
• Company goals
• Strategies to achieve goals
• Measurable, time-bound objectives
• Company History
• Mission and vision
• Unique selling proposition
• Demographics
• Psychographics
• Pain points
• Industry trends
• Customer needs
• Competitor strengths and weaknesses
• Opportunities
• Competitor products and services
• Market positioning
• Pricing strategies
• Organizational structure
• Key roles and responsibilities
• Management team backgrounds
• Product or service features
• Competitive advantages
• Marketing channels
• Advertising campaigns
• Promotional activities
• Sales strategies
• Supply chain management
• Inventory control
• Production processes
• Quality control measures
• Projected revenue
• Assumptions
• Cash inflows
• Cash outflows
• Net cash flow

What is a Business Plan?

A business plan is a strategic document that outlines an organization’s goals, objectives, and the steps required to achieve them. It serves as a roadmap as you start a business , guiding the company’s direction and growth while identifying potential obstacles and opportunities.

Typically, a business plan covers areas such as market analysis, financial projections, marketing strategies, and organizational structure. It not only helps in securing funding from investors and lenders but also provides clarity and focus to the management team.

A well-crafted business plan is a very important part of your business startup checklist because it fosters informed decision-making and long-term success.

Why You Should Write a Business Plan

Understanding the importance of a business plan in today’s competitive environment is crucial for entrepreneurs and business owners. Here are five compelling reasons to write a business plan:

• Attract Investors and Secure Funding : A well-written business plan demonstrates your venture’s potential and profitability, making it easier to attract investors and secure the necessary funding for growth and development. It provides a detailed overview of your business model, target market, financial projections, and growth strategies, instilling confidence in potential investors and lenders that your company is a worthy investment.
• Clarify Business Objectives and Strategies : Crafting a business plan forces you to think critically about your goals and the strategies you’ll employ to achieve them, providing a clear roadmap for success. This process helps you refine your vision and prioritize the most critical objectives, ensuring that your efforts are focused on achieving the desired results.
• Identify Potential Risks and Opportunities : Analyzing the market, competition, and industry trends within your business plan helps identify potential risks and uncover untapped opportunities for growth and expansion. This insight enables you to develop proactive strategies to mitigate risks and capitalize on opportunities, positioning your business for long-term success.
• Improve Decision-Making : A business plan serves as a reference point so you can make informed decisions that align with your company’s overall objectives and long-term vision. By consistently referring to your plan and adjusting it as needed, you can ensure that your business remains on track and adapts to changes in the market, industry, or internal operations.
• Foster Team Alignment and Communication : A shared business plan helps ensure that all team members are on the same page, promoting clear communication, collaboration, and a unified approach to achieving the company’s goals. By involving your team in the planning process and regularly reviewing the plan together, you can foster a sense of ownership, commitment, and accountability that drives success.

What are the Different Types of Business Plans?

In today’s fast-paced business world, having a well-structured roadmap is more important than ever. A traditional business plan provides a comprehensive overview of your company’s goals and strategies, helping you make informed decisions and achieve long-term success. There are various types of business plans, each designed to suit different needs and purposes. Let’s explore the main types:

• Startup Business Plan: Tailored for new ventures, a startup business plan outlines the company’s mission, objectives, target market, competition, marketing strategies, and financial projections. It helps entrepreneurs clarify their vision, secure funding from investors, and create a roadmap for their business’s future. Additionally, this plan identifies potential challenges and opportunities, which are crucial for making informed decisions and adapting to changing market conditions.
• Internal Business Plan: This type of plan is intended for internal use, focusing on strategies, milestones, deadlines, and resource allocation. It serves as a management tool for guiding the company’s growth, evaluating its progress, and ensuring that all departments are aligned with the overall vision. The internal business plan also helps identify areas of improvement, fosters collaboration among team members, and provides a reference point for measuring performance.
• Strategic Business Plan: A strategic business plan outlines long-term goals and the steps to achieve them, providing a clear roadmap for the company’s direction. It typically includes a SWOT analysis, market research, and competitive analysis. This plan allows businesses to align their resources with their objectives, anticipate changes in the market, and develop contingency plans. By focusing on the big picture, a strategic business plan fosters long-term success and stability.
• Feasibility Business Plan: This plan is designed to assess the viability of a business idea, examining factors such as market demand, competition, and financial projections. It is often used to decide whether or not to pursue a particular venture. By conducting a thorough feasibility analysis, entrepreneurs can avoid investing time and resources into an unviable business concept. This plan also helps refine the business idea, identify potential obstacles, and determine the necessary resources for success.
• Growth Business Plan: Also known as an expansion plan, a growth business plan focuses on strategies for scaling up an existing business. It includes market analysis, new product or service offerings, and financial projections to support expansion plans. This type of plan is essential for businesses looking to enter new markets, increase their customer base, or launch new products or services. By outlining clear growth strategies, the plan helps ensure that expansion efforts are well-coordinated and sustainable.
• Operational Business Plan: This type of plan outlines the company’s day-to-day operations, detailing the processes, procedures, and organizational structure. It is an essential tool for managing resources, streamlining workflows, and ensuring smooth operations. The operational business plan also helps identify inefficiencies, implement best practices, and establish a strong foundation for future growth. By providing a clear understanding of daily operations, this plan enables businesses to optimize their resources and enhance productivity.
• Lean Business Plan: A lean business plan is a simplified, agile version of a traditional plan, focusing on key elements such as value proposition, customer segments, revenue streams, and cost structure. It is perfect for startups looking for a flexible, adaptable planning approach. The lean business plan allows for rapid iteration and continuous improvement, enabling businesses to pivot and adapt to changing market conditions. This streamlined approach is particularly beneficial for businesses in fast-paced or uncertain industries.
• One-Page Business Plan: As the name suggests, a one-page business plan is a concise summary of your company’s key objectives, strategies, and milestones. It serves as a quick reference guide and is ideal for pitching to potential investors or partners. This plan helps keep teams focused on essential goals and priorities, fosters clear communication, and provides a snapshot of the company’s progress. While not as comprehensive as other plans, a one-page business plan is an effective tool for maintaining clarity and direction.
• Nonprofit Business Plan: Specifically designed for nonprofit organizations, this plan outlines the mission, goals, target audience, fundraising strategies, and budget allocation. It helps secure grants and donations while ensuring the organization stays on track with its objectives. The nonprofit business plan also helps attract volunteers, board members, and community support. By demonstrating the organization’s impact and plans for the future, this plan is essential for maintaining transparency, accountability, and long-term sustainability within the nonprofit sector.
• Franchise Business Plan: For entrepreneurs seeking to open a franchise, this type of plan focuses on the franchisor’s requirements, as well as the franchisee’s goals, strategies, and financial projections. It is crucial for securing a franchise agreement and ensuring the business’s success within the franchise system. This plan outlines the franchisee’s commitment to brand standards, marketing efforts, and operational procedures, while also addressing local market conditions and opportunities. By creating a solid franchise business plan, entrepreneurs can demonstrate their ability to effectively manage and grow their franchise, increasing the likelihood of a successful partnership with the franchisor.

Using Business Plan Software

Creating a comprehensive business plan can be intimidating, but business plan software can streamline the process and help you produce a professional document. These tools offer a number of benefits, including guided step-by-step instructions, financial projections, and industry-specific templates. Here are the top 5 business plan software options available to help you craft a great business plan.

1. LivePlan

LivePlan is a popular choice for its user-friendly interface and comprehensive features. It offers over 500 sample plans, financial forecasting tools, and the ability to track your progress against key performance indicators. With LivePlan, you can create visually appealing, professional business plans that will impress investors and stakeholders.

2. Upmetrics

Upmetrics provides a simple and intuitive platform for creating a well-structured business plan. It features customizable templates, financial forecasting tools, and collaboration capabilities, allowing you to work with team members and advisors. Upmetrics also offers a library of resources to guide you through the business planning process.

Bizplan is designed to simplify the business planning process with a drag-and-drop builder and modular sections. It offers financial forecasting tools, progress tracking, and a visually appealing interface. With Bizplan, you can create a business plan that is both easy to understand and visually engaging.

Enloop is a robust business plan software that automatically generates a tailored plan based on your inputs. It provides industry-specific templates, financial forecasting, and a unique performance score that updates as you make changes to your plan. Enloop also offers a free version, making it accessible for businesses on a budget.

5. Tarkenton GoSmallBiz

Developed by NFL Hall of Famer Fran Tarkenton, GoSmallBiz is tailored for small businesses and startups. It features a guided business plan builder, customizable templates, and financial projection tools. GoSmallBiz also offers additional resources, such as CRM tools and legal document templates, to support your business beyond the planning stage.

Business Plan FAQs

What is a good business plan.

A good business plan is a well-researched, clear, and concise document that outlines a company’s goals, strategies, target market, competitive advantages, and financial projections. It should be adaptable to change and provide a roadmap for achieving success.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are to guide the company’s strategy, attract investment, and evaluate performance against objectives. Here’s a closer look at each of these:

• It outlines the company’s purpose and core values to ensure that all activities align with its mission and vision.
• It provides an in-depth analysis of the market, including trends, customer needs, and competition, helping the company tailor its products and services to meet market demands.
• It defines the company’s marketing and sales strategies, guiding how the company will attract and retain customers.
• It describes the company’s organizational structure and management team, outlining roles and responsibilities to ensure effective operation and leadership.
• It sets measurable, time-bound objectives, allowing the company to plan its activities effectively and make strategic decisions to achieve these goals.
• It provides a comprehensive overview of the company and its business model, demonstrating its uniqueness and potential for success.
• It presents the company’s financial projections, showing its potential for profitability and return on investment.
• It demonstrates the company’s understanding of the market, including its target customers and competition, convincing investors that the company is capable of gaining a significant market share.
• It showcases the management team’s expertise and experience, instilling confidence in investors that the team is capable of executing the business plan successfully.
• It establishes clear, measurable objectives that serve as performance benchmarks.
• It provides a basis for regular performance reviews, allowing the company to monitor its progress and identify areas for improvement.
• It enables the company to assess the effectiveness of its strategies and make adjustments as needed to achieve its objectives.
• It helps the company identify potential risks and challenges, enabling it to develop contingency plans and manage risks effectively.
• It provides a mechanism for evaluating the company’s financial performance, including revenue, expenses, profitability, and cash flow.

Can I write a business plan by myself?

Yes, you can write a business plan by yourself, but it can be helpful to consult with mentors, colleagues, or industry experts to gather feedback and insights. There are also many creative business plan templates and business plan examples available online, including those above.

We also have examples for specific industries, including a using food truck business plan , salon business plan , farm business plan , daycare business plan , and restaurant business plan .

Is it possible to create a one-page business plan?

Yes, a one-page business plan is a condensed version that highlights the most essential elements, including the company’s mission, target market, unique selling proposition, and financial goals.

How long should a business plan be?

A typical business plan ranges from 20 to 50 pages, but the length may vary depending on the complexity and needs of the business.

What is a business plan outline?

A business plan outline is a structured framework that organizes the content of a business plan into sections, such as the executive summary, company description, market analysis, and financial projections.

What are the 5 most common business plan mistakes?

The five most common business plan mistakes include inadequate research, unrealistic financial projections, lack of focus on the unique selling proposition, poor organization and structure, and failure to update the plan as circumstances change.

What questions should be asked in a business plan?

A business plan should address questions such as: What problem does the business solve? Who is the specific target market ? What is the unique selling proposition? What are the company’s objectives? How will it achieve those objectives?

What’s the difference between a business plan and a strategic plan?

A business plan focuses on the overall vision, goals, and tactics of a company, while a strategic plan outlines the specific strategies, action steps, and performance measures necessary to achieve the company’s objectives.

How is business planning for a nonprofit different?

Nonprofit business planning focuses on the organization’s mission, social impact, and resource management, rather than profit generation. The financial section typically includes funding sources, expenses, and projected budgets for programs and operations.

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• Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. cash flow statement & projection.

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. balance sheet projection.

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to create financial projections.

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

Free Small Business Income Statements, Spreadsheets, and Templates

By Andy Marker | April 6, 2022

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We’ve compiled a collection of the most helpful small business income statements, worksheets, and templates for small business owners and other stakeholders, free to download. 

Included on this page, you’ll find a small business income statement template , a small business balance sheet and income statement template , a simple small business cash flow template , and a small business comparative income statement . Plus, you’ll find helpful tips on using a small business income statement template .

Printable Small Business Income and Expenses Template

Download Printable Small Business Income and Expenses Template Microsoft Excel | Microsoft Word | Adobe PDF | Google Sheets

Use this printable small business income and expenses template to determine your net income over a period of time. Enter values into the customizable line-item rows, and the template will calculate your revenue and cost of goods sold (COGS) to determine your gross profit. Enter your expenses (such as rent, utilities, and office supplies) to see your total net income. This template is a great tool to track your business's finances over time. 

Read our article on free small business expense templates to find additional resources and to get the most out of your small business budgeting.

Yearly Small Business Income Statement Template

Download Yearly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this yearly small business income statement template to manage your profit and losses over a three-year timeline. Track your costs in the customizable Expenses column, and enter your revenue and expenses to determine your net income. The template also includes a built-in tax rate calculator for a more accurate account of your net profit. 

To find more resources, check out our comprehensive roundup of free profit and loss templates .

Monthly Small Business Income Statement Template

Download Monthly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this monthly small business income statement template to track and manage your small business finances. Enter the number of customers and the average sale per customer to determine your total monthly sales. Then, enter your operating, payroll, and office expenses to determine your total expenses. The template will automatically calculate these totals to show your net profit.

Sample Small Business Income Statement Template

Download Sample Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this simple small business income statement template for an overall analysis of your net income. You can customize the Revenue and Expenses lines to include items specific to your business; additionally, the template includes a Years Represented column that allows you to compare numbers over a two-year timeline. This is the perfect tool for taking a quick snapshot of your business cash flow. 

To find more resources, check out our small business budget templates.

Printable Monthly Small Business Income and Expenses Worksheet Template

Download Printable Monthly Small Business Income and Expenses Worksheet Template Microsoft Excel | Adobe PDF | Google Sheets

This simple, printable template is the perfect tool for tracking your business’s income, expenses, and transactions. The template includes three separate worksheets — simply enter monthly financial data, and the template will automatically calculate yearly totals. Help ensure you meet your financial goals, accurately predict projections, and make necessary adjustments with this template.

Freelance Income Statement Template

Download Freelance Income Statement Template Microsoft Excel | Google Sheets

Self-employed individuals can use this template to track their business income from clients, along with any business expenses. Enter your personalized expenses, including rent, office supplies, and insurance, to see your cash outflow. Then, enter your taxes, and the template will automatically calculate your net income. This is a must-have tool for small business owners looking to understand their business profits.

Daily Income and Expenditure Template for Small Business

Download Daily Income and Expenditure Template for Small Business Microsoft Excel | Google Sheets

For a daily analysis of your small business’s cash flow, use this template to track cash receipts, cash payments, and operating expenses. The template automatically calculates these totals on a daily basis to provide you with a detailed financial report. The template also shows your monthly ending cash position, so you can avoid any shortcomings. 

Check out our profit and loss templates for more resources on tracking your business’s cash flow.

Small Business Balance Sheet and Income Statement Template

Download Small Business Balance Sheet and Income Statement Template Microsoft Excel | Google Sheets

Use this income and expenses spreadsheet to help ensure that you never lose sight of your small business’s financial outlook. Enter your revenue and expenses, and the template will automatically calculate your net income. Plus, the customizable year columns enable you to compare your net income over a five-year timeline so that you can easily forecast your business’s economic health. 

Read our article on small business balance sheet templates for more resources on tracking your business expenses.

Small Business Income Statement Template

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

This simple small business income statement template calculates your total revenue and expenses, including advising, equipment, and employee benefits, to determine your net income. Use this template to track and compare your finances over a two-year timeline. Save the document so that you always have quick insight into the financial status of your business.

Startup Business Income and Expenses Template

Download Startup Business Income and Expenses Template Microsoft Excel | Adobe PDF | Google Sheets

Use this startup business income and expenses template to track your business’s cash flow. Compare your budgeted expenses and funding to your actual spending to understand any discrepancies. Overall, this template can help you make well-informed, financially accurate predictions so that you can reach your business goals.

Simple Small Business Cash Flow Template

Download Simple Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this simple small business cash flow template to monitor your cash increase or decrease over a certain period of time. Enter your cash receipts, payments, COGS, and operating expenses, and the built-in formulas will calculate your total cash payments, net cash change, and month-ending cash position.

Simple Small Business Profit and Loss Template

Download Simple Small Business Profit and Loss Template Microsoft Excel | Google Sheets

Regardless of your industry, you can use this simple small business profit and loss template to analyze your business’s financial status over a specific period of time. Customize your expenses by adding or removing line items, and the built-in formulas will calculate your gross profit and net income. 

Read our article on small business profit and loss templates to find additional resources and to get the most out of your small business’s profit and loss tracking.

Small Business Comparative Income Template

Download Small Business Comparative Income Template Microsoft Excel | Google Sheets

Use this detailed small business comparative template to closely maintain watch over your financial position. Enter line items for income and expenses to compare your budget to actual calculations. With detailed use, this template will enable you to never lose sight of your business's cash flow.

What Is a Small Business Income Statement Template?

A small business income statement template is a financial statement used to report performance. Templates include calculations for revenue, expenses, and overall profit and loss, and they are used to document, analyze, and project business finances. 

If you are a current or prospective small business owner, it’s imperative that you track your income and expenses, as doing so will ensure you have accurate information regarding how your company spends and makes money. An income statement template helps you to identify areas of risk and patterns in profit and loss, and to make educated decisions around your budget. 

A small business income statement template typically includes the following line items for tracking your business's financial status: 

• Budget: A budget is a spending plan for your business based on your estimated income and expenses.
• Cash Ending Position: This refers to the money your business has at any specific point in time. 
• Cash Flow: This is the amount of money that moves in and out of your business. 
• Cost of Goods Sold (COGS): This is any money spent that is associated with your product, such as packaging and labor.
• Expenses: List anything on which you spend money to run your business, such as rent, advertising, equipment, insurance, phone, and employee salaries. 
• Gross Profit: Determine this number by subtracting the COGS from your total sales.
• Gross Revenue: The formula to calculate gross revenue is total revenue less the COGS. 
• Income: List anything that brings money into your business, such as sales and donations. 
• Net Income or Net Profit: This number reflects the amount earned from sales.
• Revenue: Calculate revenue by adding together the total amount of income made by sales and services. 
• Tax: This includes any mandatory monetary contributions made to the government.

Manage Income Statements and Drive Success with Smartsheet for Small Businesses

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With Smartsheet, you can align your team on strategic initiatives, improve collaboration efforts, and automate repetitive processes, giving you the ability to make better business decisions and boost effectiveness as you scale. 

When you wear a lot of hats, you need a tool that empowers you to get more done in less time. Smartsheet helps you achieve that. Try free for 30 days, today .

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• Building Your Business

How To Create Financial Projections for Your Business

Learn how to anticipate your business’s financial performance

• Understanding Financial Projections & Forecasting

Why Forecasting Is Critical for Your Business

Key financial statements for forecasting, how to create your financial projections, frequently asked questions (faqs).

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Just like a weather forecast lets you know that wearing closed-toe shoes will be important for that afternoon downpour later, a good financial forecast allows you to better anticipate financial highs and lows for your business.

Neglecting to compile financial projections for your business may signal to investors that you’re unprepared for the future, which may cause you to lose out on funding opportunities.

Read on to learn more about financial projections, how to compile and use them in a business plan, and why they can be crucial for every business owner.

Key Takeaways

• Financial forecasting is a projection of your business's future revenues and expenses based on comparative data analysis, industry research, and more.
• Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts, which can be attractive to investors.
• Some of the key components to include in a financial projection include a sales projection, break-even analysis, and pro forma balance sheet and income statement.
• A financial projection can not only attract investors, but helps business owners anticipate fixed costs, find a break-even point, and prepare for the unexpected.

Understanding Financial Projections and Forecasting

Financial forecasting is an educated estimate of future revenues and expenses that involves comparative analysis to get a snapshot of what could happen in your business’s future.

This process helps in making predictions about future business performance based on current financial information, industry trends, and economic conditions. Financial forecasting also helps businesses make decisions about investments, financing sources, inventory management, cost control strategies, and even whether to move into another market.

Developing both short- and mid-term projections is usually necessary to help you determine immediate production and personnel needs as well as future resource requirements for raw materials, equipment, and machinery.

Financial projections are a valuable tool for entrepreneurs as they offer insight into a business's ability to generate profit, increase cash flow, and repay debts. They can also be used to make informed decisions about the business’s plans. Creating an accurate, adaptive financial projection for your business offers many benefits, including:

• Attracting investors and convincing them to fund your business
• Anticipating problems before they arise
• Visualizing your small-business objectives and budgets
• Demonstrating how you will repay small-business loans
• Planning for more significant business expenses
• Showing business growth potential
• Helping with proper pricing and production planning

Financial forecasting is essentially predicting the revenue and expenses for a business venture. Whether your business is new or established, forecasting can play a vital role in helping you plan for the future and budget your funds.

Creating financial projections may be a necessary exercise for many businesses, particularly those that do not have sufficient cash flow or need to rely on customer credit to maintain operations. Compiling financial information, knowing your market, and understanding what your potential investors are looking for can enable you to make intelligent decisions about your assets and resources.

The income statement, balance sheet, and statement of cash flow are three key financial reports needed for forecasting that can also provide analysts with crucial information about a business's financial health. Here is a closer look at each.

Income Statement

An income statement, also known as a profit and loss statement or P&L, is a financial document that provides an overview of an organization's revenues, expenses, and net income.

Balance Sheet

The balance sheet is a snapshot of the business's assets and liabilities at a certain point in time. Sometimes referred to as the “financial portrait” of a business, the balance sheet provides an overview of how much money the business has, what it owes, and its net worth.

The assets side of the balance sheet includes what the business owns as well as future ownership items. The other side of the sheet includes liabilities and equity, which represent what it owes or what others owe to the business.

A balance sheet that shows hypothetical calculations and future financial projections is also referred to as a “pro forma” balance sheet.

Cash Flow Statement

A cash flow statement monitors the business’s inflows and outflows—both cash and non-cash. Cash flow is the business’s projected earnings before interest, taxes, depreciation, and amortization ( EBITDA ) minus capital investments.

Here's how to compile your financial projections and fit the results into the three above statements.

A financial projections spreadsheet for your business should include these metrics and figures:

• Sales forecast
• Balance sheet
• Operating expenses
• Payroll expenses (if applicable)
• Amortization and depreciation
• Cash flow statement
• Income statement
• Cost of goods sold (COGS)
• Break-even analysis

Here are key steps to account for creating your financial projections.

Projecting Sales

The first step for a financial forecast starts with projecting your business’s sales, which are typically derived from past revenue as well as industry research. These projections allow businesses to understand what their risks are and how much they will need in terms of staffing, resources, and funding.

Sales forecasts also enable businesses to decide on important levels such as product variety, price points, and inventory capacity.

Income Statement Calculations

A projected income statement shows how much you expect in revenue and profit—as well as your estimated expenses and losses—over a specific time in the future. Like a standard income statement, elements on a projection include revenue, COGS, and expenses that you’ll calculate to determine figures such as the business’s gross profit margin and net income.

If you’re developing a hypothetical, or pro forma, income statement, you can use historical data from previous years’ income statements. You can also do a comparative analysis of two different income statement periods to come up with your figures.

Anticipate Fixed Costs

Fixed business costs are expenses that do not change based on the number of products sold. The best way to anticipate fixed business costs is to research your industry and prepare a budget using actual numbers from competitors in the industry. Anticipating fixed costs ensures your business doesn’t overpay for its needs and balances out its variable costs. A few examples of fixed business costs include:

• Rent or mortgage payments
• Operating expenses (also called selling, general and administrative expenses or SG&A)
• Utility bills
• Insurance premiums

Unfortunately, it might not be possible to predict accurately how much your fixed costs will change in a year due to variables such as inflation, property, and interest rates. It’s best to slightly overestimate fixed costs just in case you need to account for these potential fluctuations.

Find Your Break-Even Point

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors.

To find this number, you need to determine two things: your fixed costs and variable costs. Once you have these figures, you can find your BEP using this formula:

Break-even point = fixed expenses ➗ 1 – (variable expenses ➗ sales)

The BEP is an essential consideration for any projection because it is the point at which total revenue from a project equals total cost. This makes it the point of either profit or loss.

Plan for the Unexpected

It is necessary to have the proper financial safeguards in place to prepare for any unanticipated costs. A sudden vehicle repair, a leaky roof, or broken equipment can quickly derail your budget if you aren't prepared. Cash management is a financial management plan that ensures a business has enough cash on hand to maintain operations and meet short-term obligations.

To maintain cash reserves, you can apply for overdraft protection or an overdraft line of credit. Overdraft protection can be set up by a bank or credit card business and provides short-term loans if the account balance falls below zero. On the other hand, a line of credit is an agreement with a lending institution in which they provide you with an unsecured loan at any time until your balance reaches zero again.

How do you make financial projections for startups?

Financial projections for startups can be hard to complete. Historical financial data may not be available. Find someone with financial projections experience to give insight on risks and outcomes.

Consider business forecasting, too, which incorporates assumptions about the exponential growth of your business.

Startups can also benefit from using EBITDA to get a better look at potential cash flow.

What are the benefits associated with forecasting business finances?

Forecasting can be beneficial for businesses in many ways, including:

• Providing better understanding of your business cash flow
• Easing the process of planning and budgeting for the future based on income
• Improving decision-making
• Providing valuable insight into what's in their future
• Making decisions on how to best allocate resources for success

How many years should your financial forecast be?

Your financial forecast should either be projected over a specific time period or projected into perpetuity. There are various methods for determining how long a financial forecasting projection should go out, but many businesses use one to five years as a standard timeframe.

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The Best Free Business Budget Templates

Published: October 12, 2023

Business budgets are a source of truth for your income and expenses. That includes all the money you spend — from A/B testing your marketing campaigns to your monthly office rent.

While organizing the numbers may sound difficult, using a business budget template makes the process simple. Plus, there are thousands of business budget templates for you to choose from.

We’ll share seven budget templates that can help organize your finances. But first, you’ll learn about different types of business budgets and how to create one.

What is a Business Budget?

A business budget is a spending plan that estimates the revenue and expenses of a business for a period of time, typically monthly, quarterly, or yearly.

The business budget follows a set template, which you can fill in with estimated revenues, plus any recurring or expected business expenses.

For example, say your business is planning a website redesign. You'd need to break down the costs by category: software, content and design, testing, and more.

Having a clear breakdown will help you estimate how much each category will cost and compare it with the actual costs.

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Types of Budgets for a Business

Master budget, operating budget, cash budget, static budget, departmental budget, capital budget, labor budget, project budget.

Business budgets aren’t one size fits all. In fact, there are many different types of budgets that serve various purposes. Let’s dive into some commonly used budgets:

Think of a master budget as the superhero of budgets — it brings together all the individual budgets from different parts of your company into one big, consolidated plan. It covers everything from sales and production to marketing and finances.

It includes details like projected revenues, expenses, and profitability for each department or business unit. It also considers important financial aspects like cash flow, capital expenditures, and even creates a budgeted balance sheet to show the organization's financial position.

The master budget acts as a guide for decision-making, helps with strategic planning, and gives a clear picture of the overall financial health and performance of your company. It's like the master plan that ties everything together and helps the organization move in the right direction.

Your operating budget helps your company figure out how much money it expects to make and spend during a specific period, usually a year. It not only predicts the revenue your business will bring in, but also outlines expenses it will need to cover, like salaries, rent, bills, and other operational costs.

By comparing your actual expenses and revenue to the budgeted amounts, your company can see how it's performing and make adjustments if needed. It helps keep things in check, allowing your business to make wise financial decisions and stay on track with its goals.

Free Business Budget Templates

Manage your business, personal, and program spend on an annual, quarterly, and monthly basis.

• Personal Budget Template
• Annual Budget Template
• Program Budget Template

You're all set!

Click this link to access this resource at any time.

A cash budget estimates the cash inflows and outflows of your business over a specific period, typically a month, quarter, or year. It provides a detailed projection of cash sources and uses, including revenue, expenses, and financing activities.

The cash budget helps you effectively manage your cash flow, plan for cash shortages or surpluses, evaluate the need for external financing, and make informed decisions about resource allocation.

By utilizing a cash budget, your business can ensure it has enough cash on hand to meet its financial obligations, navigate fluctuations, and seize growth opportunities.

A static budget is a financial plan that remains unchanged, regardless of actual sales or production volumes.

It’s typically created at the beginning of a budget period and doesn’t account for any fluctuations or changes in business conditions. It also assumes that all variables, such as sales, expenses, and production levels, will remain the same throughout the budget period.

While a static budget provides a baseline for comparison, it may not be realistic for businesses with fluctuating sales volumes or variable expenses.

A departmental budget focuses on the financial aspects of a specific department within your company, such as sales, marketing or human resources.

When creating a departmental budget, you may look at revenue sources like departmental sales, grants, and other sources of income. On the expense side, you consider costs such as salaries, supplies, equipment, and any other expenses unique to that department.

The goal of a departmental budget is to help the department manage its finances wisely. It acts as a guide for making decisions and allocating resources effectively. By comparing the actual numbers to the budgeted amounts, department heads can see if they're on track or if adjustments need to be made.

A capital budget is all about planning for big investments in the long term. It focuses on deciding where to spend money on things like upgrading equipment, maintaining facilities, developing new products, and hiring new employees.

The budget looks at the costs of buying new stuff, upgrading existing things, and even considers depreciation, which is when something loses value over time. It also considers the return on investment, like how much money these investments might bring in or how they could save costs in the future.

The budget also looks at different ways to finance these investments, whether it's through loans, leases, or other options. It's all about making smart decisions for the future, evaluating cash flow, and choosing investments that will help the company grow and succeed.

A labor budget helps you plan and manage the costs related to your employees. It involves figuring out how much your business will spend on wages, salaries, benefits, and other labor-related expenses.

To create a labor budget, you'll need to consider factors like how much work needs to be done, how many folks you'll need to get it done, and how much it'll all cost. This can help your business forecast and control labor-related expenses and ensure adequate staffing levels.

By having a labor budget in place, your business can monitor and analyze your labor costs to make informed decisions and optimize your resources effectively.

A project budget is the financial plan for a specific project.

Let's say you have an exciting new project you want to tackle. A project budget helps you figure out how much money you'll need and how it will be allocated. It covers everything from personnel to equipment and materials — basically, anything you'll need to make the project happen.

By creating a project budget, you can make sure the project is doable from a financial standpoint. It helps you keep track of how much you planned to spend versus how much you actually spend as you go along. That way, you have a clear idea of whether you're staying on track or if there are any financial challenges that need attention.

How to Create a Business Budget

While creating a business budget can be straightforward, the process may be more complex for larger companies with multiple revenue streams and expenses.

No matter the size of your business, here are the basic steps to creating a business budget.

1. Gather financial data.

Before you create a business budget, it’s important to gather insights from your past financial data. By looking at things like income statements, expense reports, and sales data, you can spot trends, learn from past experiences, and see where you can make improvements.

Going through your financial history helps you paint a true picture of your income and expenses. So, when you start creating your budget, you can set achievable targets and make sure your estimates match what's actually been happening in your business.

2. Find a template, or make a spreadsheet.

There are many free or paid budget templates online. You can start with an already existing budget template. We list a few helpful templates below.

You may also opt to make a spreadsheet with custom rows and columns based on your business.

3. Fill in revenues.

Once you have your template, start by listing all the sources of your business’ income. With a budget, you’re planning for the future, so you’ll also need to forecast revenue streams based on previous months or years. For a new small business budget, you’ll rely on your market research to estimate early revenue for your company.

When you estimate your revenue , you're essentially figuring out how much money you have to work with. This helps you decide where to allocate your resources and which expenses you can fund.

4. Subtract fixed costs for the time period.

Fixed costs are the recurring costs you have during each month, quarter, or year. Examples include insurance, rent for office space, website hosting, and internet.

The key thing to remember about fixed costs is that they stay relatively stable, regardless of changes in business activity. Even if your sales decrease or production slows down, these costs remain the same.

However, it's important to note that fixed costs can still change over the long term, such as when renegotiating lease agreements or adjusting employee salaries.

5. Consider variable costs.

Variable costs will change from time to time. Unlike fixed costs, variable costs increase or decrease as the level of production or sales changes.

Examples include raw materials needed to manufacture your products, packaging and shipping costs, utility bills, advertising costs, office supplies, and new software or technology.

You may always need to pay some variable costs, like utility bills. However, you can shift how much you spend toward other expenses, like advertising costs, when you have a lower-than-average estimated income.

6. Set aside time for business budget planning.

Unexpected expenses might come up, or you might want to save to expand your business. Either way, review your budget after including all expenses, fixed costs, and variable costs. Once completed, you can determine how much money you can save. It’s wise to create multiple savings accounts. One should be used for emergencies. The other holds money that can be spent on the business to drive growth.

Fill out the form to get the free templates.

How to manage a business budget.

There are a few key components to managing a healthy business budget.

Budget Preparation

The process all starts with properly preparing and planning the budget at the beginning of each month, quarter, or year. You can also create multiple budgets, some short-term and some long-term. During this stage, you will also set spending limits and create a system to regularly monitor the budget.

Budget Monitoring

In larger businesses, you might delegate budget tracking to multiple supervisors. But even if you’re a one-person show, keep a close eye on your budget. That means setting a time in your schedule each day or week to review the budget and track actual income and expenses. Be sure to compare the actual numbers to the estimates.

Budget Forecasting

With regular budget tracking, you always know how your business is doing. Check in regularly to determine how you are doing in terms of revenue and where you have losses. Find where you can minimize expenses and how you can move more money into savings.

Why is a Budget Important for a Business?

A budget is crucial for businesses. Without one, you could easily be drowning in expenses or unexpected costs.

The business budget helps with several operations. You can use a business budget to keep track of your finances, save money to help you grow the business or pay bonuses in the future, and prepare for unexpected expenses or emergencies.

You can also review your budget to determine when to take the next leap for your business. For example, you might be dreaming of a larger office building or the latest software, but you want to make sure you have a healthy net revenue before you make the purchase.

Best Free Business Budget Templates

1. marketing budget template.

Knowing how to manage a marketing budget can be a challenge, but with helpful free templates like this marketing budget template bundle , you can track everything from advertising expenses to events and more.

This free bundle includes eight different templates, so you can create multiple budgets to help you determine how much money to put toward marketing, plus the return on your investment.

2. Small Business Budget Template

For small businesses, it can be hard to find the time to draw up a budget, but it’s crucial to help keep the business in good health.

Capterra offers a budget template specifically for small businesses. Plus, this template works with Excel. Start by inputting projections for the year. Then, the spreadsheet will project the month-to-month budget. You can input your actual revenue and expenses to compare, making profits and losses easy to spot.

3. Startup Budget Template

What if you don’t have any previous numbers to rely on to create profit and expense estimates? If you are a startup, this Gusto budget template will help you draw up a budget before your business is officially in the market. This will help you track all the expenses you need to get your business up and running, estimate your first revenues, and determine where to pinch pennies.

4. Free Business Budget Template

You might be familiar with Intuit. Many companies, big and small, rely on Intuit’s services like Quickbooks and TurboTax. Even if you don’t use the company’s paid financial services, you can take advantage of Intuit’s free budget template , which works in Google Sheets or Excel.

It features multiple spreadsheet tabs and simple instructions. You enter your revenue in one specific tab and expenses in another. You can also add additional tabs as needed. Then, like magic, the spreadsheet uses the data in the income and expense tabs to summarize the information. This template can even determine net savings and the ending balance.

5. Department Budget Sheet

A mid- to large-size company will have multiple departments, all with different budgetary needs. These budgets will all be consolidated into a massive, company-wide budget sheet. Having a specific template for each department can help teams keep track of spending and plan for growth.

This free template from Template.net works in either document or spreadsheet formats. This budget template can help different departments keep track of their income and spending.

6. Project Budget Template

Every new project comes with expenses. This free budget template from Monday will help your team estimate costs before undertaking a project. You can easily spot if you're going over budget midway through a project so you can adjust.

This template is especially useful for small companies that are reporting budgets to clients and for in-house teams getting buy-in for complex projects.

7. Company Budget Template

Want to keep track of every penny? Use this template from TemplateLab to draw up a detailed budget. The list of expenses includes fixed costs, employee costs, and variable costs. This business template can be especially useful for small businesses that want to keep track of expenses in one, comprehensive document.

Create a Business Budget to Help Your Company Grow

Making your first business budget can be daunting, especially if you have several revenue streams and expenses. Using a budget template can make getting started easy. And, once you get it set up, these templates are simple to replicate.

With little planning and regular monitoring, you can plan for the future of your business.

Editor's note: This post was originally published in September 2021 and has been updated for comprehensiveness.

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What Are Business Expenses? Examples, Tips and FAQs

Any company will have business expenses. Meticulously tracking them ensures you know where your funds are going, and it helps you reduce your tax liability. It’s also crucial to understand what business expenses are and what you can deduct so you're not paying more taxes than necessary.

What Are Business Expenses?

According to the Internal Revenue Service (IRS), business expenses are ordinary and necessary costs incurred to operate your business. Examples include inventory, payroll and rent. Fixed expenses are regular and don’t change much — things like rent and insurance. Variable expenses are expected, but they can change. Some examples include sales commissions, gas for business vehicles and shipping costs. You expect variable expenses each month, but the actual amount will vary. Tracking your business expenses helps you keep an eye on whether you’ll see profits or losses.

Key Takeaways

• Business expenses need to be considered ordinary and necessary for them to be tax-deductible.
• Business expenses are recorded on an income (profit and loss) statement.

Business Expenses Explained

Also referred to as deductions, business expenses are the costs of operating a business. They’re recorded on the income statement. These expenses will be subtracted from business revenue to show a company's net profit or loss and taxable income.

Guidelines for business expenses can be found in Section 162 of the Internal Revenue Code (IRC). As long as an expense is considered ordinary and necessary, it can be reported to the IRS to help reduce tax liability.

According to the IRS, ordinary refers to expenses common to most business owners in the industry or trade. Necessary means your expenses help with your business operations, and they're appropriate to your organization.

How Do Business Expenses Impact or Reduce Taxes?

Any expense that meets the IRS definition of ordinary and necessary can be deducted. To be written off, an expense needs to be incurred by a business intending to make a profit. Some expenses may be fully deductible, whereas others are partially deductible or won’t be fully deducted the year they’re incurred.

What Are Examples of Deductible Business Expenses?

The following business expenses may be fully or partially deductible:

• Advertising and marketing
• Bank fees and interest
• Business mileage
• Commissions
• Educational expenses for employees
• Employee benefits
• Equipment maintenance and repair
• Home office (you’ll need to meet certain requirements such as that it is your main place of business)
• Membership dues (business-related expenses only)
• Office supplies and equipment
• Payroll (employees and contractors)
• Rent or office lease
• Mortgage payments
• Some costs of business travel

What Are Examples of Non-Deductible Business Expenses?

Not all business expenses are tax-deductible.

Here are some examples:

• Demolition expenses or losses
• Educational expenses incurred to meet requirements to conduct business
• Government fines and penalties
• Illegal activities
• Lobbying expenses
• Political contributions

Also note that capital expenditures, while deductible, are typically written off over several years through an accounting process known as depreciation.

Income Statement Reporting

Your income statement is the main financial statement used when recording business expenses and determining your taxable income. The income statement shows a picture of your company’s expenses and revenues over a given period of time. The statements are typically broken into different categories.

Costs of Goods Sold (COGS): Also known as cost of sales, COGS refer to the cost of manufactured or purchased goods sold. COGS are a business expense and affect how much profit a company makes on its products. It's deducted from a business's total revenue to determine gross profit and can include factory overhead, storage, cost of raw materials and parts used to make a product, direct labor costs, shipping or freight in costs and indirect costs, such as distribution or sales force costs.

Operating Costs: Operating costs are any expenses associated with the day-to-day maintenance and administration of a business. Operating costs include fixed, variable and semi-variable costs. These expenses are subtracted from gross profit to find operating profit and typically include marketing costs and executive compensation. Gifts and meals would also fall under this category.

Depreciation: Depreciation is the process of deducting the cost of a business asset over a long period of time, rather than over one year. Depreciation has two main components: one is the decrease in the value of an asset over time and when you allocate the price you originally paid for an asset over the period of time you use that asset. Generally Accepted Accounting Principles (GAAP) requires that companies use standard depreciation methods with specific depreciation schedules for various asset categories. Amortization is similar to depreciation, but is a method of spreading the cost of an intangible asset over a specific period of time.

Interest expenses: Interest paid on loans is subtracted from taxable income.

Personal vs. Business Expenses

Business expenses can be deducted to lower your company’s overall taxable income. Personal expenses cannot. So, what are some of the differences and is there ever a gray area?

Personal expenses: It’s vital that you keep your personal expenses separate from business. For example, if you go to the hardware store to buy some lumber for a personal project and throw in some industrial cleaner to scrub the floors of your store, be sure to run two transactions. That way you can keep separate receipts and if you have a business credit or debit card, you can use that for the business purchase.

Business expenses: Are you making a purchase to try and drive more revenue to your business? Is it something that would be considered a normal purchase in your industry? It’s likely a business expense. Record the purchase, store the receipt and record the reason for the purchase. The amount can be deducted from your income and lower your tax liability. Large expenses that increase the long-term value of your business like buying new equipment or investing in a new building are considered capital expenditures and are handled differently than other expenses .

Key differences: Business purchases are things you buy in the normal operations of your business. Personal expenses are items that do not pertain to your business. But what about things like home offices? If you use an office out of your home primarily for business purposes, you may be able to write off that expense. But you won’t be able to deduct the entire price of your home mortgage. There are occasions when you can itemize certain aspects of expenses like utilities, real estate taxes or phones. It’s especially important for you to keep meticulous records that detail why you’re expensing these items, in case you are ever audited.

Top 6 Business Expense Tips

Staying on top of your business expenses can be overwhelming. But it is also one of the easiest ways to reduce your overall tax liability. Here are some tips to make expense management a little easier.

Keep meticulous records.

When in doubt, keep it. Not only will receipts and other documentation of your business expenses come in handy if you’re ever audited, the IRS requires some records be kept for up to 7 years. Things like receipts, tax returns and employment records need to be kept for 3-4 years. And documentation of writing off bad debt should be kept for 7 years. Consider using business accounting software to track your expenses and go paperless for record keeping.

Separate personal and business expenses.

Business expenses can be written off and reduce your overall tax liability. Start separating your business and personal expenses right away. Open a separate business checking account. Get a business credit or debit card. And make sure your business partners know which expenses can be written off, and which can’t.

Brush up on what expenses are considered tax deductible.

Not all expenses are tax deductible. But most expenses you incur while trying to drive revenue to your business can be written off. Some major purchases like large equipment are considered capital expenditures. The initial purchase may not be written off all in one tax year, but the depreciation of value, along with the costs of running it would be.

Save receipts for business travel.

Many business travel expenses are tax deductible. Keep records of costs like transportation, lodging and some of the meals (usually 50% of the cost.) Keep your receipts for these expenses for at least three years, as long as the IRS can audit you.

Record expenses as soon as possible.

Whether you store your records yourself or use a business accounting software program, get in the habit of recording expenses right away. Formalize the process for how you track and store the receipts and record expenses.

Monitor and review expenses regularly.

Business accounting software can display your expense information with charts and dashboards. And if you track your expenses manually, be sure to build regular review into the expense management policies and procedures. Consider double-entry bookkeeping to catch errors and prevent fraud.

How to Track Business Expenses?

Tracking your business expenses should become a habit. By making it part of your regular workflow , you’re less likely to miss expenses that can reduce your overall tax burden. And by keeping an eye on your expenses and revenue through your income statement, you’re able to better monitor the financial health of your company.

Open a business bank account. Make sure this is separate from your personal checking account and only use it for business expenses. This will make it easier to track your business charges. And you may be eligible for business credit or debit cards that come with perks like cash back or no-interest financing for three months.

Formalize how you store receipts. Consider scanning receipts and keeping digital copies. Try and make it part of your regular workflow. If not daily, try to set aside the same time each week to scan and organize receipts. Write the business purpose on the receipt so you can remind yourself later, if needed.

Review and categorize your expenses regularly. Examine each transaction and track your spending by category. By comparing your expenses to revenue, you can see how much it costs to produce an amount of revenue in a given time.

Consider buying business accounting software. Save time and ensure you have the most up-to-date information with an accounting platform. Store and track receipts and easily categorize expenses. You can see charts and dashboards of your financial information, as well as generate important reports, like the income statement.

Tracking Business Expenses With Software

By tracking your expenses, you can reduce your tax liability. But it’s also important to keep detailed records of these expenses in case you’re audited or need to reconcile accounts. Going paperless and using business accounting software can help save time, automate processes and keep more accurate financial records, even if you have a small business or startup. As your business grows, the software will scale with your growth. And top-tier cloud solutions like NetSuite integrate with other business software, such as your CRM, inventory management and ecommerce functions.

#1 Expense Management Software

Business Expense FAQs

Can business expenses be carried forward.

Your business may be able to take a carryforward if you have a net operating loss (NOL), you're over the amount of deductions allowed and a nonrefundable credit you qualify for is more than the tax you owe in a year.

Business expenses that can be deducted are not taxed. There are a few business expenses like demolition that cannot be written off.

Can I deduct personal expenses for business?

You cannot deduct personal expenses for your business. However, if the expense is for both business and personal use, you may deduct the business portion. For example, let’s say you have a vehicle and drive to consult with on-site clients 25% of the time. You can deduct 25% of your business expenses. You’ll need to keep records such as mileage incurred, maintenance costs and the purpose of each trip.

What are the three types of business expenses?

The three major types are:

• Fixed: These expenses tend not to change and remain the same. Examples include rent or equipment lease payments.
• Variable: These expenses change from month to month. Examples include employee commissions and utilities.
• Periodic: These expenses happen occasionally. Examples include emergency equipment repairs and annual bonuses.

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Free Small-Business Budget Templates

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A business budget template is one of the most important tools you can use to run your small business. However, many small-business owners skip this vital business management step.

The misconceptions surrounding budgeting are plenty. It seems complicated and time-consuming. But with a good business budget template, the process can be much less daunting.

An effective small-business budget template is a living document. Creating a budget and then forgetting about it is wasted effort. You must compare your actual numbers against your budgeted numbers regularly.

Therefore, your budget should be easy to access and adjust on an ongoing basis. But you don’t have to spend a lot of money on business budgeting software , if you don't want to. There are several free small-business budget templates available online.

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Why you need a business budget template

A business budget template is an essential tool for business owners who want to take care of their bottom line. Why should you invest in a smart template from the start?

Here's how a business budget template can set you up for success:

Track cash flow, expenses and revenue.

Prepare for regular business slowdowns.

Allocate your budget to the portions of your business that need capital most.

Plan for business investments and purchases.

Project all costs to starting and running your business.

Generally speaking, your business budget template can act as a business health scorecard if you invest in setting one up properly. Here's our list of the best budget templates available so you can do just that.

Capterra’s Free Small-Business Budget Template

The Capterra small-business budget template has been a fan favorite since it was published in 2015. In this one simple Excel workbook, you can create your monthly budget, your annual budget and then compare your actual numbers to your budgeted numbers. It also has a convenient overview sheet, which gives users access to their performance at a glance.

To help you through the process, Capterra has included a detailed Instructions tab, which walks you through how to use the template step by step. Start here to save yourself hours of time and frustration. As a bonus, there are several resources linked on the Instructions tab to help you create the perfect budget for your small business.

PDFConverter.com 15 Best Budgets

Rather than one bloated Excel workbook that tries to do everything, PDFConverter.com has compiled a library of 15 small-business budget templates.

These templates cover a wide range of budgeting needs, from a basic overview of your business income and expenses to marketing budget templates. The startup budget template is ideal for newbie entrepreneurs still in the planning stage of their businesses. And the cash flow template is perfect for identifying and plugging cash flow leaks.

Annual Business Budget in Google Sheets

Do you love all things Google? You can create a comprehensive budget for your small business right from Google Sheets. Simply navigate to your Sheets and then click on Template Gallery . Our friends at Intuit QuickBooks have created an annual business budget you can use for free.

To fully appreciate the power of the template, review the Summary tab after you have entered your budget figures. The tables and graphs on this tab offer a visual representation of your income and expenses, making it easy to see where you stand at a glance.

Microsoft Office Template

This beautiful template from Microsoft Office focuses exclusively on expenses, but it does that job exceptionally well. There are tabs for planned and actual expenses, a tab for automatically calculated variances between the two and an expense analysis tab complete with pie charts.

Your accounting software

While not a free template per se, you likely have a powerful budgeting tool available right inside your business accounting software . Though not as flexible as a separate template, there are many advantages to using the budgeting feature of your accounting software.

The budgeting feature in your accounting software will coincide with your chart of accounts. Depending on the software you use, you can create a budget to actual comparison reports with the click of a button, making analysis a cinch.

Some software programs even let you set multiple budget scenarios and have “cloning” features, which simplify the budgeting process after the first year.

Designing your budget

Now that you’ve chosen your business budget template, it’s time to start designing your budget. This is where many small-business owners procrastinate because people typically see budgeting as restrictive or punishing.

It's time to shift your perspective on budgeting. Most people start with income and tinker with their expense amounts until they arrive at a balanced or surplus budget. This method usually leads to unrealistic projections and ends in frustration.

Instead of a top-down approach, consider “reverse engineering” your budget by following these four simple steps:

Form your income projections and write those down outside of your budget template. Put this paper or spreadsheet away until after you have completed the next step.

Enter your expenses into your budget template. Be very honest in your entries and include everything. Going through several months’ or even a year’s worth of accounting data or bank and credit card statements will ensure you capture all your spending. This is not the step where you want to try to eliminate expenses. Record everything, only excluding expenses you have already eliminated from your monthly or annual spending.

Enter your income from the projections you formed in step 1.

Review your budget. If your budget shows a projected loss, analyze your expenses and identify areas where you can reduce spending.

This approach makes sure you avoid the temptation of forcing your budget to balance. While you do want your budget to balance — or better, to show a cash surplus — having unrealistic income or expense numbers will lead to frustration and resistance during the budgeting process.

Monthly or quarterly, compare your actual income and expense numbers to your budgeted numbers. Regular tracking helps identify financial pitfalls before they become unmanageable.

Frequently asked questions

How do i make a budget template.

You can create a small-business budget template from scratch by using free software like Microsoft Excel or Google Sheets. However, it’s often more efficient to download a template (see our list above). A template with built-in tables and formulas makes plugging in your revenue and expenses and calculating your profit or loss quick and straightforward.

What is included in a small-business budget?

Your small-business budget will include your revenue, expenses and your profit or loss. Each section will be broken into subcategories. For example, under revenue, you might have sales and income from sponsorships. Expenses might be broken down into rent, employee salaries and marketing. After you tally your revenue and expenses, you can then calculate your profit and loss statement.

How much should a small-business budget be?

A budget will vary by your business and industry. For example, you can potentially start a social media consulting business for less than $5,000. But a food truck business may necessitate a budget of at least $50,000. You must tailor your small-business budget to your unique needs.

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What Are Business Expenses?

Understanding business expenses, income statement reporting, personal expenses, non-deductible expenses, the bottom line.

• Deductions & Credits
• Tax Deductions

Understanding Business Expenses and Which Are Tax Deductible

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

Business expenses are costs incurred in the ordinary course of business. Every business, from the smallest corner store to the largest corporation, tracks these expenses throughout the year for tax purposes. Business expenses are subtracted from revenue to arrive at a company’s taxable net income.

Business expenses are also referred to as deductions. These are generally divided into two major categories, capital expenditures and operational expenditures .

Key Takeaways

• Business expenses are deductions from taxable income.
• The total of business expenses is subtracted from revenue to arrive at the business' total amount of taxable income.
• The IRS defines allowable business deductions as costs that are "ordinary and necessary" for the industry in which the business operates.
• The main deductible categories are direct expenses, indirect expenses, and interest on debt.

Section 162 of the  Internal Revenue Code (IRC) details the guidelines for business expenses. The IRC allows businesses to report any expense that may be ordinary and necessary.

Business expenses need not be required to be considered ordinary or necessary. Generally, ordinary means that the expense is common in the industry and most business owners in the same line of business or trade would normally expense these things. Necessary means that the expenses are appropriate and a business owner might not be able to manage without making the expenditure.

An expense that meets the definition of ordinary and necessary for business purposes can be expensed and, therefore, is tax-deductible .

Some business expenses may be fully deductible while others are only partially deductible.

Below are some examples of fully deductible expenses:

• Advertising and marketing expenses
• Processing fees from business and corporate credit cards
• Education and training expenses for employees
• Certain legal fees
• License and regulatory fees
• Wages paid to  contract employees
• Employee benefits programs
• Equipment rentals
• Insurance costs
• Interest paid
• Office expenses and supplies
• Maintenance and repair costs
• Office lease costs
• Utility expenses

The income statement is the primary financial statement used by businesses to record their expenses and determine their taxes. Most have three categories of expenses, broken down by direct costs, indirect costs, and interest.

Direct Costs

The value of  inventory  on hand at the beginning and the end of each tax year is used in determining the cost of goods sold (COGS), which is a large direct expense for many companies.

COGS is deducted from an entity’s total revenue to determine  gross profit  for the year. Any expenses included in COGS cannot be deducted again. Expenses that are included in calculating COGS may include  direct labor costs , factory  overhead , storage, costs of products, and costs of raw materials.

Indirect Costs

Indirect costs are subtracted from gross profit to identify operating profit. Typical indirect costs include executive compensation, general expenses, depreciation, and marketing costs.

Subtracting indirect costs from gross profit results in operating profit, which is also known as earnings before interest and tax.

Depreciation

Expensing of business assets is usually done by depreciation. Depreciation is a tax-deductible expense on the income statement and is classified as an indirect expense.

Depreciation expenses can be deducted over a number of years. They typically include the costs of computers, furniture, property, equipment, trucks, and more.

Gifts, Meals, and Entertainment Costs

The IRS places limits on costs associated with gifts, meals, and entertainment. For example, you can usually deduct 50% of the cost of providing meals to employees, although certain meals may be fully deducted.

Interest Expenses

The last section of the income statement involves expenses for interest and tax. Interest is the last expense a company subtracts to arrive at its taxable income, sometimes called adjusted taxable income.

In some cases, expenses incurred by a business owner may be both personal and business-related. For example, a small business owner might use the same car for personal purposes and business-related activities.

In this case, the portion of miles used for business purposes can be deducted. In the case of home offices, costs associated with the portion of the home that is exclusively used for business are generally deductible.

Some expenses incurred by a business are not reportable. These expenses include bribes,  lobbying  costs, penalties, fines, and contributions made to political parties or candidates.

What Is an 'Ordinary and Necessary' Business Expense?

This is IRS-speak for the type of expense that a business can properly deduct . Generally, "ordinary" means normal and widespread in the industry. "Necessary" means appropriate and useful, while falling short of absolutely essential.

What Is Not a Deductible Business Expense?

Any expense that has a personal benefit rather than a business benefit is non-deductible.

Granted, this can be a gray area. If you go to Los Angeles for business purposes and spend a day at Disneyland while there, your tickets to the park are not deductible. Your flight to and from L.A. should be deductible, as long as you're ready to prove that you spent most of your time there doing business.

Can I Deduct My Car if I Use It for My LLC?

If you use a car entirely for business purposes, you can deduct the related expenses.

If you have a car that you use for both business and personal trips, only the costs related to its business use are deductible. That means keeping receipts and a careful log of mileage and other costs associated with the vehicle.

The key to business tax reporting is "ordinary and necessary" expenses. That's the phrase the IRS uses to describe the costs of doing business . Those costs are deducted from income in order to arrive at taxable income for the period being reported.

Office of the Law Revision Counsel, United States Code. " 26 USC 162: Trade or Business Expenses ."

Internal Revenue Service. " Publication 535, Business Expenses ," Page 3.

Internal Revenue Service. " Publication 535, Business Expenses ."

Accounting Tools. " Operating Profit Definition ."

Internal Revenue Service. " Topic No. 704, Depreciation ."

Internal Revenue Service. " Publication 463, Travel, Gift, and Car Expenses ," Pages 10-12.

Internal Revenue Service. " Publication 535, Business Expenses ," Pages 5-6.

Internal Revenue Service. " Publication 535, Business Expenses ," Pages 47-49.

Internal Revenue Service. " Publication 535, Business Expenses ," Page 6.

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Are You Self-Employed?

Are you a statutory employee, business owned and operated by spouses, additional information, what's new for 2023, what's new for 2024, photographs of missing children, introduction.

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Dispositions of business property and depreciable property.

Casualties and thefts.

Condemned property.

Alternative fuel vehicle refueling property credit (Form 8911).

Biodiesel, renewable diesel, or sustainable aviation fuels credits (Form 8864).

Biofuel producer credit (Form 6478).

Carbon oxide sequestration credit (Form 8933).

Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846).

Credit for employer differential wage payments (Form 8932).

Credit for employer-provided childcare facilities and services (Form 8882).

Credit for increasing research activities (Form 6765).

Credit for small employer health insurance premiums (Form 8941).

Credit for small employer pension plan startup costs, auto-enrollment, and military spouse participation (Form 8881).

Disabled access credit (Form 8826).

Distilled spirits credit (Form 8906).

Employer credit for paid family and medical leave (Form 8994).

Empowerment zone employment credit (Form 8844).

Energy efficient home credit (Form 8908).

Investment credit (Form 3468).

Low sulfur diesel fuel production credit (Form 8896).

Low-income housing credit (Form 8586).

New markets credit (Form 8874).

Orphan drug credit (Form 8820).

Clean vehicle credits (Form 8936).

Qualified railroad track maintenance credit (Form 8900).

Renewable electricity production credit (Form 8835).

Work opportunity credit (Form 5884).

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Nonemployee compensation.

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Business income deduction.

Information returns.

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Unstated interest and Original Issue Discount (OID).

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Restricted property.

Gains and losses.

Promissory notes.

Lost income payments.

Economic injury.

Punitive damages.

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Listed property.

Section 179 property.

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Amount you can exclude.

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Line 40—Add Lines 35 Through 39

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Reimbursing Your Employees for Expenses

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Section 179 deduction.

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Self-employed health insurance deduction.

How to figure the deduction.

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Income taxes.

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Baggage and shipping.

Car or truck.

Meals and lodging.

Reimbursing your employees for expenses.

Exclusive use.

Exceptions to exclusive use.

Regular use.

Principal place of business.

Deduction limit.

Simplified method.

Other Expenses You Can Deduct

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Excess business loss limitation.

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Child employed by parent.

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Effects of using an optional method.

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Publication 334 - Additional Material

Publication 334 (2023), tax guide for small business, (for individuals who use schedule c).

For use in preparing 2023 Returns

Publication 334 - Introductory Material

For the latest information about developments related to Pub. 334, such as legislation enacted after it was published, go to IRS.gov/Pub334 .

This publication provides general information about the federal tax laws that apply to you if you are a self-employed person or a statutory employee. This publication has information on business income, expenses, and tax credits that may help you, as a small business owner, file your income tax return.

You are a self-employed person if you carry on a trade or business as a sole proprietor or an independent contractor.

Trade or business. A trade or business is generally an activity carried on to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need to make ongoing efforts to further the interests of your business.

Limited liability company (LLC). An LLC is an entity formed under state law by filing articles of organization. Generally, for income tax purposes, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return. For example, if the single-member LLC is not engaged in farming and the owner is an individual, they may use Schedule C.

Sole proprietor. A sole proprietor is someone who owns an unincorporated business by themselves. You are also a sole proprietor for income tax purposes if you are an individual and the sole member of a domestic LLC unless you elect to have the LLC treated as a corporation.

Independent contractor. People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether they are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the person paying for the work has the right to control or to direct only the result of the work and not how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. For more information on determining whether you are an employee or independent contractor, see Pub. 15-A, Employer's Supplemental Tax Guide.

A statutory employee has a checkmark in box 13 of their Form W-2, Wage and Tax Statement. Statutory employees use Schedule C to report their wages and expenses.

If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C. Instead, file Form 1065, U.S. Return of Partnership Income. For more information, see Pub. 541, Partnerships.

Exception—Community income. If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. territory, you can treat the business either as a sole proprietorship or a partnership. States with community property laws include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity. See Pub. 555 for more information about community property laws.

Exception—Qualified joint venture (QJV). If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a QJV instead of a partnership for the tax year. Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. For an explanation of "material participation," see the instructions for Schedule C (Form 1040), line G.

To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C and a separate Schedule SE. For more information, see Qualified Joint Ventures in the Instructions for Schedule SE.

What you need to know. Table A provides a list of questions you need to answer to help you meet your federal tax obligations. After each question is the location in this publication where you will find the related discussion.

The IRS mission. Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Comments and suggestions. We welcome your comments about this publication and suggestions for future editions.You can send us comments through IRS.gov/FormComments . Or, you can write to the Internal Revenue Service, Tax Forms and Publications, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments and suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. If you have a tax question not answered by this publication or the How To Get Tax Help section at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/Help/ITA where you can find topics by using the search feature or viewing the categories listed.

Getting tax forms, instructions, and publications. Go to IRS.gov/Forms to download current and prior-year forms, instructions, and publications.

Ordering tax forms, instructions, and publications. Go to IRS.gov/OrderForms to order current forms, instructions, and publications; call 800-829-3676 to order prior-year forms and instructions. The IRS will process your order for forms and publications as soon as possible. Don’t resubmit requests you’ve already sent us. You can get forms and publications faster online.

Table A. What You Need To Know About Federal Taxes

The following are some of the tax changes for 2023.

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $160,200 for 2023. There is no maximum limit on earnings subject to the Medicare part.

Standard mileage rate. For 2023, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use during 2023 increased to 65.5 cents a mile.For more information, see Car and Truck Expenses in chapter 8.

Redesigned Form 1040-SS. For 2023, Schedule(s) C and SE (Form 1040) are available to be filed with Form 1040-SS, if applicable. For additional information, see the Instructions for Form 1040-SS.

Bonus depreciation. The bonus depreciation deduction under section 168(k) begins its phaseout in 2023 with a reduction of the applicable limit from 100% to 80%.

Form 7205, Energy efficient commercial buildings deduction. This form and its separate instructions are used to claim the section 179D deduction for qualifying energy efficient commercial building expenses that are now reported on new line 27b of Schedule C (Form 1040). See Form 7205 and its instructions for more information.

Commercial clean vehicle credit. Businesses that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit. See Form 8936 and its instructions for more information.

Business meal expense. The temporary 100% deduction for business meal expense has expired. The business meal deduction reverts back to the previous 50% allowable deduction beginning January 1, 2023. See Meals and lodging , later, for more information.

The following are some of the tax changes for 2024. For information on other changes, go to IRS.gov .

Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax is $168,600 for 2024.

Standard mileage rate. For 2024, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 67 cents a mile.

Excess business loss limitation. Your loss from a trade or business may be limited. Use Form 461 to determine the amount of your excess business loss, if any. Your excess business loss will be included as income on line 8p of Schedule 1 (Form 1040) and treated as a net operating loss (NOL) that you must carry forward and deduct in a subsequent tax year.For more information about the excess business loss limitation, see Form 461 and its instructions.

Qualified paid sick leave and qualified paid family leave payroll tax credit. Generally, the credit for qualified sick and family leave wages, as enacted under the Families First Coronavirus Response Act (FFCRA) and amended and extended by the COVID-related Tax Relief Act of 2020, for leave taken after March 31, 2020, and before April 1, 2021, and the credit for qualified sick and family leave wages under sections 3131, 3132, and 3133 of the Internal Revenue Code, as enacted under the American Rescue Plan Act of 2021 (the ARP), for leave taken after March 31, 2021, and before October 1, 2021, have expired. However, employers that pay qualified sick and family leave wages in 2023 for leave taken after March 31, 2020, and before October 1, 2021, are eligible to claim a credit for qualified sick and family leave wages in the quarter of 2023 in which the qualified wages were paid. For more information, see Form 941, lines 11b, 11d, 13c, and 13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must include the full amount (both the refundable and nonrefundable portions) of the credit for qualified sick and family leave wages in gross income on line 3 or 4, as applicable, for the tax year that includes the last day of any calendar quarter with respect to which a credit is allowed.

A credit is available only if the leave was taken after March 31, 2020, and before October 1, 2021, and only after the qualified leave wages were paid, which might, under certain circumstances, not occur until a quarter after September 30, 2021, including qualifying quarterly payments made during 2023. Accordingly, all lines related to qualified sick and family leave wages remain on the employment tax returns for 2023.

Reportable transactions. You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. Reportable transactions include:

Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS;

Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee;

Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits;

Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combination of tax years; and

Transactions the same as or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest.

For more information, see the Instructions for Form 8886 or Abusive Tax Shelters and Transactions .

Small Business and Self-Employed (SB/SE) Tax Center. Do you need help with a tax issue or preparing your return, or do you need a free publication or form? The SB/SE Tax Center serves taxpayers who file Form 1040; Form 1040-SR; Schedule C, E, or F; or Form 2106, as well as small business taxpayers with assets under $10 million. For additional information, go to the SB/SE Tax Center at IRS.gov/Businesses/Small .

Gig Economy Tax Center. The gig (or on-demand, sharing, or access) economy refers to an area of activity where people earn income providing on-demand work, services, or goods. Go to IRS.gov/Gig to get more information about the tax consequences of participating in the gig economy.

The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC) . Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

1. Filing and Paying Business Taxes

This chapter explains the business taxes you may have to pay and the forms you may have to file. It also discusses taxpayer identification numbers (TINs).

Table 1-1 lists the benefits of filing electronically.

Table 1-2 lists the federal taxes you may have to pay, their due dates, and the forms you use to report them.

Table 1-3 provides checklists that highlight the typical forms and schedules you may need to file if you ever go out of business.

Useful Items

Publication

505 Tax Withholding and Estimated Tax

583 Starting a Business and Keeping Records

Form (and Instructions)

461 Limitation on Business Losses

1040 U.S. Individual Income Tax Return

1040-SR U.S. Tax Return for Seniors

1040-ES Estimated Tax for Individuals

7205 Energy Efficient Commercial Buildings Deduction

Sch C (Form 1040) Profit or Loss From Business

Sch SE (Form 1040) Self-Employment Tax

See chapter 12 for information about getting publications and forms.

Identification Numbers

This section explains three types of TINs, who needs them, when to use them, and how to get them.

Generally, use your SSN as your TIN. You must put this number on each of your individual income tax forms, such as Form 1040 and its schedules.

To apply for an SSN, use Form SS-5 , Application for a Social Security Card. This form is available at Social Security Administration (SSA) offices or by calling 800-772-1213. It is also available from the SSA website at SSA.gov/forms/ss-5 .

The IRS will issue an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. The ITIN will expire for any taxpayer who does not file a federal income tax return (or who is not included as a dependent on the return of another taxpayer) for 3 consecutive years. In general, if you need to obtain an ITIN, you must attach Form W-7 , Application for IRS Individual Taxpayer Identification Number, with your signed, original, completed tax return and any other required documentation and mail them to the address in the Instructions for Form W-7. Exceptions are covered in the instructions. If you must include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. The application is also available in Spanish. The form is available at IRS.gov/FormW7 .

You must also have an EIN to use as a TIN if you do either of the following.

Pay wages to one or more employees.

File pension or excise tax returns.

If you must have an EIN, include it along with your SSN on your Schedule C as instructed.

You can apply for an EIN:

Online by clicking on the Employer ID Numbers (EINs) link at IRS.gov/EIN as long as the principal business location is in the United States or U.S. territories—the EIN is issued immediately once the application information is validated;

By telephone at 267-941-1099 (not a toll-free number) only if the principal business is located outside the United States or U.S. territories; or

By mailing or faxing Form SS-4 , Application for Employer Identification Number.

You may need to get a new EIN if either the form or the ownership of your business changes. For more information, see Pub. 1635, Understanding Your EIN.

In operating your business, you will probably make certain payments you must report on information returns. These payments are discussed under Information Returns , later in this chapter. You must give the recipient of these payments (the payee) a statement showing the total amount paid during the year. You must include the payee's identification number and your identification number on the returns and statements.

If you have employees, you must get an SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employee's social security card. If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. This may occur if the employee's name was changed due to marriage or divorce.

Form W-4, Employee's Withholding Allowance Certificate, is completed by each employee so the correct federal income tax can be withheld from their pay.

If your employee does not have an SSN, they should file Form SS-5 with the SSA.

If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you must report payments to an organization, such as a corporation or partnership, you must get its EIN.

To get the payee's SSN or EIN, use Form W-9 , Request for Taxpayer Identification Number and Certification.

A payee who does not provide you with an identification number may be subject to backup withholding. For information on backup withholding, see the Instructions for the Requester of Form W-9 and the General Instructions for Certain Information Returns.

This part explains whether you have to file an income tax return and when you file it. It also explains how you pay the tax.

You have to file an income tax return for 2023 if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Instructions for Form 1040.

File your income tax return on Form 1040 or 1040-SR and attach Schedule C . Enter the net profit or loss from Schedule C on Schedule 1 (Form 1040). Use Schedule C to figure your net profit or loss from your business. If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business.

IRS e-file (Electronic Filing)

E-file logo

I.R.S. e-file logo

Summary: This is an illustration of the logo used to identify the I.R.S. e-file program.

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Using IRS e-file does not affect your chances of an IRS examination of your return.

You can file most commonly used business forms using IRS e-file . For more information, go to IRS.gov .

Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2023. If you file electronically using tax preparation software or a tax professional, you will sign your return using the Self-Select PIN (personal identification number) Method for IRS e-file . If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures.

To create a PIN, you must know your adjusted gross income (AGI) from your originally filed 2022 income tax return (not from an amended return, Form 1040-X, or after receiving any math error notice from the IRS). You will also need to provide your date of birth (DOB). Make sure your DOB is accurate and matches the information on record with the SSA before you e-file . To do this, check your annual Social Security Statement.

With a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Form(s) W-2. For more details on the Self-Select PIN Method, go to IRS.gov .

In most states, you can file an electronic state return simultaneously with your federal return. For more information, check with your state tax agency, tax professional, or IRS.gov .

You can have your refund check mailed to you, or you can have your refund deposited directly to your checking or savings account.

With IRS e-file , your refund will be issued in half the time as when filing on paper. Most refunds are issued in less than 21 days.

As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. You will be notified if the refund you claimed has been offset against your debts.

You can check the status of your refund if it has been at least 24 hours (4 weeks if you mailed a paper return) from the date you filed your return. Be sure to have a copy of your tax return available because you will need to know the filing status, the first SSN shown on the return, and the exact whole-dollar amount of the refund. To check on your refund, do one of the following.

Go to IRS.gov/Refunds .

Download the free IRS2Go app to your smart phone and use it to check your refund status.

Call 800-829-1954 for automated refund information, and follow the recorded instructions.

The IRS can’t issue refunds before mid-February 2024 for returns that claimed the earned income credit or the additional child tax credit. This applies to the entire refund, not just the portion associated with these credits.

If your return shows that you owe tax, you must pay it by the due date of your return (without regard to any extension to file) to avoid late-payment penalties and interest. For calendar year 2023, pay by April 15, 2024. You have many options for making your payment, including by scheduling an electronic funds withdrawal from your checking or savings account or by debit or credit card. For more information about your payment options, go to IRS.gov/Payments .

Using an Authorized IRS e-file Provider

Many tax professionals can electronically file paperless returns for their clients. You have two options.

You can prepare your return, take it to an authorized IRS e-file provider, and have the provider transmit it electronically to the IRS.

You can have an authorized IRS e-file provider prepare your return and transmit it for you electronically.

You will be asked to complete Form 8879, IRS e-file Signature Authorization, to authorize the provider to enter your self-selected PIN on your return.

Depending on the provider and the specific services requested, a fee may be charged. To find an authorized IRS e-file provider near you, go to IRS.gov/Efile/Providers .

Using Your Personal Computer

A computer with Internet access is all you need to file your tax return using IRS e-file . When you use your personal computer, you can e-file your return from your home any time of the day or night. Sign your return electronically using a self-selected PIN to complete the process. There is no signature form to submit or Forms W-2 to send in.

If your AGI was $79,000 or less in 2023, you can use free tax software to prepare and e-file your tax return.

This public-private partnership, between the IRS and tax software providers, makes approximately a dozen brand-name commercial software products and e-file available for free. Just go to IRS.gov/FreeFile for details. You can review each software provider's criteria for free usage or use an online tool to find which free software products match your situation. Some software providers offer state tax return preparation for free.

The IRS also offers electronic versions of IRS paper forms that can also be e-filed for free. Free File Fillable Forms is best for people experienced in preparing their own tax returns. There is no income limitation to using these forms. Free File Fillable Forms does basic math calculations. It supports only federal tax forms.

Some businesses offer free e-file to their employees, members, or customers. Others offer it for a fee. Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit.

Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers, and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Some locations offer free electronic filing.

Table 1-1. Benefits of IRS e-file

For calendar year 2023, Form 1040 or 1040-SR is due by April 15, 2024. If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month after the end of your fiscal year. If you file late, you may have to pay penalties and interest.

If you cannot file your return on time, use Form 4868 , Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to request an automatic 6-month extension. For calendar year taxpayers, this will extend the tax filing due date until October 15. Filing an extension does not extend the time to pay your taxes, only the time to file the tax return.

How Do I Pay Income Tax?

Federal income tax is a pay-as-you-go tax. You must pay it as you earn or receive income during the year. An employee usually has income tax withheld from their pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.

You generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax (discussed later), of $1,000 or more when you file your return. Use Form 1040-ES to figure and pay the tax. If you do not have to make estimated tax payments, you can pay any tax due when you file your return. For more information on estimated tax, see Pub. 505.

You can pay your estimated tax electronically using various options. If you pay electronically, there is no need to mail in Form 1040-ES payment vouchers. These options include:

Paying electronically through the Electronic Federal Tax Payment System (EFTPS),

Paying with Direct Pay by authorizing an electronic funds withdrawal when you file Form 1040 or 1040-SR electronically, or

Paying by credit or debit card over the phone or by Internet.

To enroll in EFTPS, go to EFTPS.gov or call 800-555-4477.

When you request a new EIN, you may be automatically enrolled in EFTPS.

Benefits of EFTPS include the following.

The chance of an error in making your payments is reduced.

You receive immediate confirmation of every transaction.

If you did not pay enough income tax and self-employment tax for 2023 by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid. The IRS will figure the penalty for you and send you a bill. Or you can use Form 2210 , Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. For more information, see Pub. 505.

Self-Employment (SE) Tax

SE tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage), discussed next.

For 2023, you received one credit, up to a maximum of four credits, for each $1,640 ($1,730 for 2024) of income subject to social security tax. Therefore, for 2023, if you had income (self-employment and wages) of $6,560 that was subject to social security tax, you received four credits ($6,560 ÷ $1,640).

For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest SSA office.

Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its record but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

Your net earnings from self-employment (excluding church employee income) were $400 or more.

You had church employee income of $108.28 or more.

The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

Only the first $160,200 of your combined wages, tips, and net earnings in 2023 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or the Tier 1 part of railroad retirement tax.

All your combined wages, tips, and net earnings in 2023 are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or Medicare part of railroad retirement tax.

If wages and tips you receive as an employee are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $160,200, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

A 0.9% Additional Medicare Tax may apply to you if your net earnings from self-employment exceed one of the following threshold amounts (based on your filing status).

Married filing jointly—$250,000

Married filing separately—$125,000

Single, Head of household, or Qualifying surviving spouse—$200,000

If you have both wages and self-employment income, the threshold amount for applying the Additional Medicare Tax on the self-employment income is reduced (but not below zero) by the amount of wages subject to Additional Medicare Tax. Use Form 8959, Additional Medicare Tax, to figure this tax.

For information on methods of calculating SE tax, see chapter 10 .

Table 1-2. Which Forms Must I File?

If you have employees, you will need to file forms to report employment taxes. Employment taxes include the following items.

Social security and Medicare taxes.

Federal income tax withholding.

Federal unemployment tax (FUTA).

For more information, see Pub. 15 (Circular E), Employer's Tax Guide. That publication explains your tax responsibilities as an employer.

To help you determine whether the people working for you are your employees, see Pub. 15-A. That publication has information to help you determine whether an individual is an independent contractor or an employee.

An independent contractor is someone who is self-employed. You generally do not have to withhold or pay any taxes on payments made to an independent contractor.

Excise Taxes

This section identifies some of the excise taxes you may have to pay and the forms you have to file if you do any of the following.

Manufacture or sell certain products.

Operate certain kinds of businesses.

Use various kinds of equipment, facilities, or products.

Receive payment for certain services.

The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following.

Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals.

Communications and air transportation taxes.

Tax on the first retail sale of heavy trucks, trailers, and tractors.

Manufacturer’s taxes on the sale or use of a variety of different articles.

Tax on indoor tanning services.

There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. For more information, see the Instructions for Form 2290.

If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. For details on depositing excise taxes, see the Instructions for Form 720.

Information Returns

If you make or receive payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. You must give a copy of each information return you are required to file to the recipient or payer. In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns.

Use Form 1099-MISC, Miscellaneous Information, to report certain payments you make in your business. These payments include the following items.

Rent payments of $600 or more, other than rents paid to real estate agents.

Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.

Royalty payments of $10 or more.

Payments to certain crew members by owners or operators of fishing boats.

Amounts paid for the purchase of fish for resale from any person engaged in the business of catching fish.

File Form 1099-NEC, Nonemployee Compensation, for each person in the course of your business to whom you have paid at least $600 during the year in:

Services performed by someone who is not your employee (including parts and materials) (box 1),

Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 1), or

Payments to an attorney (box 1).

You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

You must file Form W-2 to report payments to your employees, such as wages, tips, and other compensation; and withheld income, social security, and Medicare taxes. You can file Form W-2 online. For more information about Form W-2, see the General Instructions for Forms W-2 and W-3.

The law provides for the following penalties if you do not file Form(s) 1099-MISC, Form(s) 1099-NEC, or Form(s) W-2 or do not correctly report the information. For more information, see the General Instructions for Certain Information Returns.

Failure to file information returns. This penalty applies if you do not file information returns by the due date, do not include all required information, or report incorrect information.

Failure to furnish correct payee statements. This penalty applies if you do not furnish a required statement to a payee by the required date, do not include all required information, or report incorrect information.

These penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect.

In addition, there is no penalty for failure to include all required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. (A de minimis number of returns is the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year.)

You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Cash includes U.S. and foreign coin and currency. It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Cash does not include a check drawn on an individual's personal account (personal check). For more information, see Pub. 1544, Reporting Cash Payments of Over $10,000.

There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 8300, or structuring a transaction to evade reporting requirements.

Table 1-3. Going Out of Business Checklists

2. accounting periods and methods.

You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year.

538 Accounting Periods and Methods

Accounting Periods

When preparing a statement of income and expenses (generally, your income tax return), you must use your books and records for a specific interval of time called an accounting period. The annual accounting period for your income tax return is called a tax year . You can use one of the following tax years.

A calendar tax year.

A fiscal tax year.

A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.

You must adopt the calendar tax year if any of the following apply.

You do not keep books.

You have no annual accounting period.

Your present tax year does not qualify as a fiscal year.

Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations.

If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. For more information, see Change in tax year , later.

If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year.

A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.

If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year.

For more information on a fiscal tax year, including a 52-53-week tax year, see Pub. 538.

Generally, you must file Form 1128 , Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. See the Instructions for Form 1128 for exceptions. If you qualify for an automatic approval request, a user fee is not required. If you do not qualify for automatic approval, a ruling must be requested. See the Instructions for Form 1128 for information about user fees if you are requesting a ruling.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported. Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item.

You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. After that, if you want to change your accounting method, you must generally get IRS approval. See Change in Accounting Method , later.

Generally, you can use any of the following accounting methods.

An accrual method.

Special methods of accounting for certain items of income and expenses.

Combination method using elements of two or more of the above.

You must use the same accounting method to figure your taxable income and to keep your books. Also, you must use an accounting method that clearly shows your income.

You can account for business and personal items under different accounting methods. For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items.

If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. They are separate and distinct only if you maintain complete and separate books and records for each business.

Cash Method

Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases, unless you are a small business taxpayer (defined later in this chapter). For more information, see Inventories , later.

Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. If you receive property or services, you must include their fair market value in income.

On December 30, 2022, a client sent you a check for interior decorating services you provided to them. You received the check on January 4, 2023. You must include the amount of the check in income for 2023.

You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it.

Interest is credited to your bank account in December 2023. You do not withdraw it or enter it into your passbook until 2024. You must include it in your gross income for 2023.

You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.

A service contractor was entitled to receive a $10,000 payment on a contract in December 2023. They were told in December that their payment was available. At their request, they were not paid until January 2024. They must include this payment in their 2023 income because it was constructively received in 2023.

Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year.

You received a check for $500 on December 30, 2023, from a client. You could not deposit the check in your business account until January 3, 2024. You must include this fee in income for 2023.

If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. If you receive income in this way, you constructively receive the income when the debt is canceled or paid. For more information, see Canceled Debt under Kinds of Income in chapter 5.

If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. If the amount you repay is over $3,000, a special rule applies. For details about the special rule, see Repayments in chapter 8 of Pub. 17.

Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. This includes business expenses for which you contest liability. However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules .

You can deduct an expense you pay in advance only in the year to which it applies.

You are a calendar year taxpayer and you pay $1,000 in 2023 for a business insurance policy effective for 1 year, beginning July 1. You can deduct $500 in 2023 and $500 in 2024.

Accrual Method

Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. For a taxpayer with an applicable financial statement or other financial statement as the Secretary may specify, the all-events test for an item of gross income is considered met no later than when taken into account in an applicable financial statement or such other financial statement.

You are a calendar year accrual method taxpayer. You sold a computer on December 28, 2023. You billed the customer in the first week of January 2024, but you did not receive payment until February 2024. You must include the amount received for the computer in your 2023 income.

Income—Special Rules

The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services.

If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination.

If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.

Generally, you report an advance payment as income in the year you receive the payment. However, if you receive an advance payment, you can elect to postpone including the advance payment in income until the next tax year. You cannot postpone including any payment beyond that tax year.

For more information, see Pub. 538 and section 451.

Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply.

The all-events test has been met. The test has been met when:

All events have occurred that fix the fact of liability, and

The liability can be determined with reasonable accuracy.

Economic performance has occurred.

You generally cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. For more information on economic performance, see Economic Performance under Accrual Method in Pub. 538.

You are a calendar year taxpayer and use an accrual method of accounting. You buy office supplies in December 2023. You receive the supplies and the bill in December, but you pay the bill in January 2024. You can deduct the expense in 2023 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year.

Your office supplies may qualify as a recurring expense. In that case, you can deduct them in 2023 even if the supplies are not delivered until 2024 (when economic performance occurs).

When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year, unless you are a small business taxpayer. If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. For more information, see Inventories , later.

You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person.

Related persons include members of your immediate family, including siblings (either whole or half), your spouse, ancestors, and lineal descendants. For a list of other related persons, see section 267 of the Internal Revenue Code.

You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. However, the following restrictions apply.

If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. (See, however, Inventories , later.) You can use the cash method for all other items of income and expenses.

If you use the cash method for figuring your income, you must use the cash method for reporting your expenses.

If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income.

If you use a combination method that includes the cash method, treat that combination method as the cash method.

Inventories

Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise.

If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.

You qualify as a small business taxpayer if you (a) have average annual gross receipts of $29 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)). If your business has not been in existence for all of the 3-tax-year period used in figuring average gross receipts, base your average on the period it has existed, and if your business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period when figuring average gross receipts. If your business (or predecessor entity) had short tax years for any of the 3-tax-year period, annualize your business’ gross receipts for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information.

If you account for inventories as materials and supplies that are not incidental, you deduct the amounts paid or incurred to acquire or produce the inventoriable items treated as non-incidental materials and supplies in the year in which they are first used or consumed in your operations. Inventory treated as non-incidental materials and supplies is used or consumed in your business in the year you provide the inventory to your customers.

Your financial accounting treatment of inventories is determined with regard to the method of accounting you use in your applicable financial statement (as defined in section 451(b)(3)) or, if you do not have an applicable financial statement, with regard to the method of accounting you use in your books and records that have been prepared in accordance with your accounting procedures.

If you want to change your method of accounting for inventory, you must file Form 3115, Application for Change in Accounting Method. See Change in Accounting Method , later.

If you are required to account for inventories, include the following items when accounting for your inventory.

Merchandise or stock in trade.

Raw materials.

Work in process.

Finished products.

Supplies that physically become a part of the item intended for sale.

You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items.

Inventory valuation rules cannot be the same for all kinds of businesses. The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Your inventory practices must be consistent from year to year.

For more information about inventories, see Pub. 538.

Uniform Capitalization Rules

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.

You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit.

Produce real or tangible personal property. For this purpose, tangible personal property includes a film, sound recording, videotape, book, or similar property.

Acquire property for resale.

These rules do not apply to the following.

Small business taxpayers , defined earlier under Inventories .

Property you produce if your indirect costs of producing the property are $200,000 or less.

There are special methods of accounting for certain items of income or expense. These include the following.

Amortization, discussed in chapter 7 of Pub. 225.

Bad debts, discussed under Topic No. 453, Bad Debt Deduction .

Depletion, discussed in chapter 7 of Pub. 225.

Depreciation, discussed in Pub. 946, How To Depreciate Property.

Installment sales, discussed in Pub. 537, Installment Sales.

Long-term contract methods of accounting. See section 460.

Change in Accounting Method

Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. A change in your accounting method includes a change in:

Your overall method, such as from cash to an accrual method; and

Your treatment of any material item.

Certain taxpayers can presume to have IRS approval to change their method of accounting. The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2015-13, 2015-5 I.R.B. 419, which is available at IRS.gov/IRB/2015-05_IRB#RP-2015-13 (or its successor).

Generally, you must use Form 3115 to request an automatic change. For more information, see the Instructions for Form 3115.

3. Dispositions of Business Property

If you dispose of business property, you may have a gain or loss that you report on your tax return. However, in some cases, you may have a gain that is not taxable or a loss that is not deductible. This chapter discusses whether you have a disposition, how to figure the gain or loss, and where to report the gain or loss.

544 Sales and Other Dispositions of Assets

4797 Sales of Business Property

Sch D (Form 1040) Capital Gains and Losses

What Is a Disposition of Property?

A disposition of property includes the following transactions.

You sell property for cash or other property.

You exchange property for other property.

You receive money as a tenant for the cancellation of a lease.

You receive money for granting the exclusive use of a copyright throughout its life in a particular medium.

You transfer property to satisfy a debt.

You abandon property.

Your bank or other financial institution forecloses on your mortgage or repossesses your property.

Your property is damaged, destroyed, or stolen, and you receive property or money in payment.

Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment.

You give property away.

Certain exchanges of property are not taxable. This means any gain from the exchange is not recognized and you cannot deduct any loss. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive.

A like-kind exchange is the exchange of property for other like-kind property. It is the most common type of nontaxable exchange. To be a like-kind exchange, the property traded and the property received must be both (a) real property, and (b) business or investment property.

Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. For more information about like-kind exchanges, see chapter 1 of Pub. 544.

An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. If you finance the buyer's purchase of your property, instead of having the buyer get a loan or mortgage from a third party, you probably have an installment sale.

For more information about installment sales, see Pub. 537.

The sale of a business is usually not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.

Both the buyer and seller involved in the sale of a business must report to the IRS the allocation of the sales price among the business assets. Use Form 8594 , Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.

For more information about the sale of a business, see Pub. 544.

How Do I Figure a Gain or Loss?

Table 3-1. How To Figure a Gain or Loss

Basis, adjusted basis, amount realized, fair market value, and amount recognized are defined next. You need to know these definitions to figure your gain or loss.

The cost or purchase price of property is usually its basis for figuring the gain or loss from its sale or other disposition. However, if you acquired the property by gift, by inheritance, or in some way other than buying it, you must use a basis other than its cost. For more information about basis, see Pub. 551, Basis of Assets.

The adjusted basis of property generally is your original cost or other basis plus certain additions, and minus certain deductions such as depreciation and casualty losses. In determining gain or loss, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property.

Generally, the amount you realize from a disposition is the total of all money you receive plus the fair market value of all property or services you receive. The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.

Fair market value is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Your gain or loss realized from a disposition of property is usually a recognized gain or loss for tax purposes. Recognized gains must be included in gross income. Recognized losses are deductible from gross income. However, a gain or loss realized from certain exchanges of property is not recognized. See Nontaxable exchanges , earlier. Also, you cannot deduct a loss from the disposition of property held for personal use.

You must classify your gains and losses as either ordinary or capital gains or losses. You must do this to figure your net capital gain or loss. Generally, you will have a capital gain or loss if you dispose of a capital asset. For the most part, everything you own and use for personal purposes or investment is a capital asset.

Certain property you use in your business is not a capital asset. A gain or loss from a disposition of this property is an ordinary gain or loss. However, if you held the property longer than 1 year, you may be able to treat the gain or loss as a capital gain or loss. These gains and losses are called section 1231 gains and losses.

For more information about ordinary and capital gains and losses, see chapters 2 and 3 of Pub. 544.

If you have a capital gain or loss, you must determine whether it is long term or short term. Whether a gain or loss is long or short term depends on how long you own the property before you dispose of it. The time you own property before disposing of it is called the holding period.

Table 3-2. Do I Have a Short-Term or Long-Term Gain or Loss?

For more information about short-term and long-term capital gains and losses, see chapter 4 of Pub. 544.

Where Do I Report Gains and Losses?

Report gains and losses from the following dispositions on the forms indicated. The instructions for the forms explain how to fill them out.

Use Form 4797 . If you have taxable gain, you may also have to use Schedule D (Form 1040).

Use Form 8824 . You may also have to use Form 4797 and Schedule D (Form 1040).

Use Form 6252 , Installment Sale Income. You may also have to use Form 4797 and Schedule D (Form 1040).

Use Form 4684 , Casualties and Thefts. You may also have to use Form 4797.

Use Form 4797 . You may also have to use Schedule D (Form 1040).

4. General Business Credits

Your general business credit for the year consists of your carryforward of business credits from prior years plus the total of your current year business credits. In addition, your general business credit for the current year may be increased later by the carryback of business credits from later years. You subtract this credit directly from your tax.

3800 General Business Credit

6251 Alternative Minimum Tax—Individuals

Business Credits

All of the following credits are part of the general business credit. The form you use to figure each credit is shown in parentheses. You will also have to complete Form 3800.

Some credits have expiration dates. Check the instructions for each credit to make sure it is available for 2023.

This credit applies to the cost of any qualified fuel vehicle refueling property. For more information, see Form 8911.

For more information, see Form 8864.

For more information, see Form 6478.

This credit is for carbon oxide that is captured at a qualified facility and disposed of in secure geological storage or used in a qualified enhanced oil or natural gas recovery project. For more information, see Form 8933.

This credit is generally equal to your (employer's) portion of social security and Medicare taxes paid on tips received by employees of your food and beverage establishment where tipping is customary. The credit applies regardless of whether the food is consumed on or off your business premises. For more information, see Form 8846.

This credit provides businesses with an incentive to continue to pay wages to an employee performing services on active duty in the uniformed services of the United States for a period of more than 30 days. For more information, see Form 8932.

This credit applies to the qualified expenses you paid for employee childcare and qualified expenses you paid for childcare resource and referral services. For more information, see Form 8882.

This credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities, including energy research. For more information, see Form 6765.

This credit applies to the cost of certain health insurance coverage you provide to certain employees. For more information, see Form 8941.

This credit applies to pension plan startup costs of a new qualified defined benefit or defined contribution plan (including a section 401(k) plan), SIMPLE plan, or SEP plan. For more information, see Pub. 560, Retirement Plans for Small Business.

This credit is a nonrefundable tax credit for an eligible small business that pays or incurs expenses to provide access to persons who have disabilities. You must pay or incur the expenses to enable your business to comply with the Americans with Disabilities Act of 1990. For more information, see Form 8826.

This credit is available to distillers and importers of distilled spirits and eligible wholesalers of distilled spirits. For more information, see Form 8906.

This credit applies for wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions. For more information, see Form 8994.

You may qualify for this credit if you have employees and are engaged in a business in an empowerment zone for which the credit is available. For more information, see Form 8844.

This credit is available for eligible contractors of certain homes sold for use as a residence. For more information, see Form 8908.

The investment credit is the total of the several credits. For more information, see Form 3468.

For more information, see Form 8896.

This credit generally applies to each qualified low-income building placed in service after 1986. For more information, see Form 8586.

This credit is for qualified equity investments made in qualified community development entities. For more information, see Form 8874.

This credit applies to qualified expenses incurred in testing certain drugs for rare diseases and conditions. For more information, see Form 8820.

These credits are for certain clean vehicles placed in service during the tax year. For more information, see Form 8936.

This credit applies to qualified railroad track maintenance expenditures paid or incurred during the tax year. For more information, see Form 8900.

This credit is for renewable energy sources produced in the United States or U.S. territories from qualified energy resources at a qualified facility. For more information, see Form 8835.

This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. For more information, see Form 5884.

To claim a general business credit, you will first have to get the forms you need to claim your current year business credits.

In addition to the credit form, you also need to file Form 3800.

5. Business Income

This chapter primarily explains business income and how to account for it on your tax return and what items are not considered income, and it gives guidelines for selected occupations.

If there is a connection between any income you receive and your business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if you did not have the business.

You can have business income even if you are not involved in the activity on a regular full-time basis. Income from work you do on the side in addition to your regular job can be business income. For example, you may be in the business of providing services for a ride-sharing business as a second job.

You report most business income, such as income from selling your products or services, on Schedule C. But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C. For information on selling business assets, see chapter 3 .

Business income includes amounts you received in your business that were properly shown on Forms 1099-NEC. This includes amounts reported as nonemployee compensation in box 1 of the form. You can find more information in the instructions on the back of the Form 1099-NEC you received.

If you are in a business, you may receive a Form 1099-K representing the total dollar amount of total reportable payment transactions. This may not be the amount you should report as income, as it may not include all the receipts and it may include items that are not included in your receipts (such as sales tax).

Income you report on Schedule C may be qualified business income and entitle you to a deduction on Form 1040 or 1040-SR, line 13. See Form 8995-A or Form 8995 to figure your deduction, if any.

Kinds of Income

You must report on your tax return all income you receive from your business unless it is excluded by law. In most cases, your business income will be in the form of cash, checks, and credit card charges. But business income can be in other forms, such as property or services. These and other types of income are explained next.

Bartering for Property or Services

Bartering is an exchange of property or services. You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise.

You are a self-employed lawyer. You perform legal services for a client, a small corporation. In payment for your services, you receive shares of stock in the corporation. You must include the fair market value of the shares in income.

You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. You must include the fair rental value of the apartment in your gross receipts. Your landlord must include the fair market value of the work of art in their rental income.

You are a self-employed accountant. Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Members get in touch with other members directly and bargain for the value of the services to be performed.

In return for accounting services you provided for the house painter's business, the house painter painted your home. You must include in gross receipts the fair market value of the services you received from the house painter. The house painter must include the fair market value of your accounting services in their gross receipts.

You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members.

You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account.

The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. It is wages subject to social security and Medicare taxes (FICA), FUTA taxes, and income tax withholding. See Pub. 15.

You operate a plumbing business and use the cash method of accounting. You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Each member has access to a directory that lists the members of the club and the services available.

Members contact each other directly and request services to be performed. You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee.

You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members.

If you are involved in a bartering transaction, you may have to file either of the following forms.

Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.

Real Estate Rents

If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. For more information, see Pub. 527, Residential Rental Property.

You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent you receive from real estate held for sale to customers is subject to SE tax. However, rent you receive from real estate held for speculation or investment is not subject to SE tax.

Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants.

You are generally considered to provide substantial services for tenants if they are primarily for the tenants' convenience and are not normally provided to maintain the lots in a condition for occupancy. Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments.

Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers.

Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways.

Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants.

Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. An example of a service that is not normally provided for the convenience of the occupants is maid service. However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience.

Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. This is generally true no matter what accounting method or period you use.

A bonus you receive from a lessee for granting a lease is an addition to the rent. Include it in your gross receipts in the year received.

Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received.

If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. A common example of this kind of income is a lessee's payment of your property taxes on leased real property.

Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee.

If you are in the business of renting personal property (equipment, vehicles, formal wear, etc.), include the rental amount you receive in your gross receipts on Schedule C. Prepaid rent and other payments described under Real Estate Rents , earlier, can also be received for renting personal property. If you receive any of those payments, include them in your gross receipts as explained in that discussion.

Interest and Dividend Income

Interest and dividends may be considered business income.

Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Interest received on loans is business income if you are in the business of lending money.

If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you generally must include in gross income qualified stated interest accrued up to the time the loan became uncollectible. If the accrued interest that you previously included later becomes uncollectible, you may be able to take a bad debt deduction. See Bad Debts in chapter 8.

If little or no interest is charged on an installment sale contract, you may have to treat a part of each payment as unstated interest. See Unstated Interest and Original Issue Discount (OID) in Pub. 537.

Generally, dividends are business income to dealers in securities. For most sole proprietors and statutory employees, however, dividends are nonbusiness income. If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income.

If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. To find out how much you have to report, see Recovery of items previously deducted under Other Income , later.

Canceled Debt

The following explain the general rule for including canceled debt in income and the exceptions to the general rule.

Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. If the debt is a nonbusiness debt, report the canceled amount on line 8c of Schedule 1 (Form 1040).

The following discussion covers some exceptions to the general rule for canceled debt.

If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property.

You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction.

You get accounting services for your business on credit. Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Your accountant forgives part of the amount you owe for the accounting services. How you treat the canceled debt depends on your method of accounting.

Cash method—You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense.

Accrual method—You include the canceled debt in income because the expense was deductible when you incurred the debt.

For information on the cash and accrual methods of accounting, see chapter 2 .

Do not include canceled debt in income in the following situations. However, you may be required to file Form 982 , Reduction of Tax Attributes Due to Discharge of Indebtedness. For more information, see Form 982.

The cancellation takes place in a bankruptcy case under title 11 of the U.S. Code (relating to bankruptcy). See Pub. 908, Bankruptcy Tax Guide.

The cancellation takes place when you are insolvent. You can exclude the canceled debt to the extent you are insolvent. See Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

The canceled debt is a qualified farm debt owed to a qualified person. See chapter 3 of Pub. 225, Farmer's Tax Guide.

The canceled debt is a qualified real property business debt. This situation is explained later.

The canceled debt is qualified principal residence indebtedness which is discharged after 2006. See the Instructions for Form 982 for more information about this exclusion.

For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold.

You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition.

Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions.

It was incurred or assumed in connection with real property used in a trade or business. Real property used in a trade or business does not include real property developed and held primarily for sale to customers in the ordinary course of business.

It was secured by such real property.

It was incurred or assumed at either of the following times.

Before January 1, 1993.

After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property.

It is debt to which you choose to apply these rules.

Qualified real property business debt includes refinancing of debt described in (3) above, but only to the extent it does not exceed the debt being refinanced.

You cannot exclude more than either of the following amounts.

The excess (if any) of:

The outstanding principal of qualified real property business debt (immediately before the cancellation); over

The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation.

The total adjusted bases of depreciable real property held by you immediately before the cancellation. These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy or insolvency, or of qualified farm debt. Do not take into account depreciable real property acquired in contemplation of the cancellation.

To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. You must file your return by the due date (including extensions). If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). For more information, see When To File in the form instructions.

Other Income

The following discussion explains how to treat other types of business income you may receive.

Restricted property is property that has certain restrictions that affect its value. If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C when the restriction is lifted. However, you can choose to be taxed in the year you receive the property. For more information on including restricted property in income, see Pub. 525, Taxable and Nontaxable Income.

Do not report on Schedule C a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Instead, you must report these gains and losses on other forms. For more information, see chapter 3 .

Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C. In general, you report them at their stated principal amount (minus any unstated interest) or issue price (for debt instruments with OID) when you receive them.

If you reduce or stop your business activities, report on Schedule C any payment you receive for the lost income of your business from insurance or other sources. Report it on Schedule C even if your business is inactive when you receive the payment.

You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business.

Patent infringement.

Breach of contract or fiduciary duty.

Antitrust injury.

You may be entitled to a deduction against the income if it compensates you for actual economic injury. Your deduction is the smaller of the following amounts.

The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount.

Your loss from the injury that you have not yet deducted.

You must also include punitive damages in income.

If you receive any kickbacks, include them in your income on Schedule C. However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold.

If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C. However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion.

This rule does not apply to depreciation. You recover depreciation using the rules explained next.

In the following situations, you have to recapture the depreciation deduction. This means you include in income part or all of the depreciation you deducted in previous years.

If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Use Part IV of Form 4797 to figure the amount to include on Schedule C. For more information, see What Is the Business-Use Requirement? in chapter 5 of Pub. 946. That chapter explains how to determine whether property is used more than 50% in your business.

If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. You do this by including in income on Schedule C part of the deduction you took. Use Part IV of Form 4797 to figure the amount to include on Schedule C. See chapter 2 of Pub. 946 to find out when you recapture the deduction.

If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. You figure the income due to depreciation recapture in Part III of Form 4797. For more information, see chapter 4 of Pub. 544.

Items That Are Not Income

In some cases, the property or money you receive is not income.

Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition.

Consignments of merchandise to others to sell for you are not sales. The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Merchandise you have shipped out on consignment is included in your inventory until it is sold.

Do not include merchandise you receive on consignment in your inventory. Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use.

If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions.

Under a short-term lease of retail space.

For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space.

You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements.

A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. The following rules apply in determining whether the lease is for 15 years or less.

Take into account options to renew when figuring whether the lease is for 15 years or less. But do not take into account any option to renew at fair market value determined at the time of renewal.

Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease.

Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public.

Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends.

Generally, if you exchange real property used for business or held as an investment solely for other business or investment real property of a like kind, no gain or loss is recognized. This means that the gain is not taxable and the loss is not deductible. For more information, see Form 8824.

If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income.

Money borrowed through a bona fide loan is not income.

State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income.

Guidelines for Selected Occupations

This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040).

You must report all income you receive as a direct seller on Schedule C. This includes any of the following.

Income from sales—Payments you receive from customers for products they buy from you.

Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you.

Prizes, awards, and gifts you receive from your selling business.

You are a direct seller if you meet all the following conditions.

You are engaged in one of the following trades or businesses.

Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment.

Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business).

Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked.

Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes.

If you administer a deceased person's estate, your fees are reported on Schedule C if you are one of the following.

A professional fiduciary.

A nonprofessional fiduciary (personal representative) and both of the following apply.

The estate includes an active trade or business in which you actively participate.

Your fees are related to the operation of that trade or business.

A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business.

If the fees do not meet the above requirements, report them on line 8z of Schedule 1 (Form 1040).

If you are a member of a crew that catches fish or other aquatic life, your earnings are reported on Schedule C if you meet all the requirements shown in chapter 10 under Fishing crew member .

Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C if all the following conditions are met.

You received payments after your agreement to perform services for the company ended.

You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment.

You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended.

The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both.

The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service).

Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C. Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C.

However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C.

You are a direct seller and your earnings are reported on Schedule C if all the following conditions apply.

You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts).

Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work.

You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes.

This rule applies whether or not you hire others to help you make deliveries. It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver.

If you are age 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C if all the following conditions apply.

You sell newspapers or magazines to ultimate consumers.

You sell them at a fixed price.

Your earnings are based on the difference between the sales price and your cost of goods sold.

This rule applies whether or not you are guaranteed a minimum amount of earnings. It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier.

Fees you receive for services you perform as a notary public are reported on Schedule C. These payments are not subject to SE tax (see the Instructions for Schedule SE (Form 1040)).

Public officials generally do not report what they earn for serving in public office on Schedule C. This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Public office includes any elective or appointive office of the United States or its territories, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these.

Public officials of state or local governments report their fees from the public on Schedule C if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement.

If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C if both the following apply.

Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work.

If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C. For more information, see sections 1256 and 1402(i).

You are a trader in securities or commodities if you are engaged in the business of buying and selling securities or commodities for your own account. As a trader in securities or commodities (including if you made the section 475(f) mark-to-market election as a trader in securities or commodities), your gain or loss from the disposition of securities or commodities is not reported on Schedule C. For more information about traders in securities or commodities, see Pub. 550, Investment Income and Expenses, and Topic No. 429, Traders in Securities .

Accounting for Your Income

Accounting for your income for income tax purposes differs at times from accounting for financial purposes. This section discusses some of the more common differences that may affect business transactions.

Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2 ). If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Dealers in real estate are not allowed to use inventories. For more information on inventories, see chapter 2 .

All income you earn is taxable to you. You cannot avoid tax by having the income paid to a third party.

You rent out your property and the rental agreement directs the lessee to pay the rent to your son. The amount paid to your son is gross income to you.

These are amounts the seller permits you to deduct from the invoice price for prompt payment. For income tax purposes, you can use either of the following two methods to account for cash discounts.

Deduct the cash discount from purchases (see Line 36—Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6).

Credit the cash discount to a discount income account.

If you use the second method, the credit balance in the account at the end of your tax year is business income. Under this method, you do not reduce the cost of goods sold by the cash discounts you received. When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise.

These are reductions from list or catalog prices and are usually not written into the invoice or charged to the customer. Do not enter these discounts on your books of account. Instead, use only the net amount as the cost of the merchandise purchased. For more information, see Trade discounts in chapter 6.

If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year.

Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales.

Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method .

If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. You cannot deduct the reimbursed part of a casualty or theft loss.

For information on casualty or theft losses, see Pub. 547.

6. How To Figure Cost of Goods Sold

If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. However, to determine these costs, you must value your inventory at the beginning and end of each tax year.

This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you.

Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42

Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. These lines are reproduced below and are explained in the discussion that follows.

Line 35—Inventory at Beginning of Year

If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2).

Opening inventory will usually be identical to the closing inventory of the year before. You must explain any difference in a schedule attached to your return.

If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.

If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

A special rule may apply to certain donations of food inventory. See Pub. 526, Charitable Contributions.

You are a calendar year taxpayer who uses an accrual method of accounting. In 2023, you contributed property from inventory to a church. It had a fair market value of $600. The closing inventory at the end of 2022 properly included $400 of costs due to the acquisition of the property, and in 2022, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. The charitable contribution allowed for 2023 is $400 ($600 − $200). The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. The cost of goods sold you use in determining gross income for 2023 must not include the $400. You remove that amount from opening inventory for 2023.

If, in Example 1 , you acquired the contributed property in 2023 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2023 and deduct the $50 of administrative and other expenses attributable to the property for that year. You would not be allowed any charitable contribution deduction for the contributed property.

Line 36—Purchases Less Cost of Items Withdrawn for Personal Use

If you are a merchant, use the cost of all merchandise you bought for sale. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product.

The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Do not show the discount amount separately as an item in gross income.

An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount.

Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. There are two methods of accounting for cash discounts. You can either credit them to a separate discount account or deduct them from total purchases for the year. Whichever method you use, you must be consistent. If you want to change your method of figuring inventory cost, you must file Form 3115. For more information, see Change in Accounting Method in chapter 2.

If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. If you use this method, do not reduce your cost of goods sold by the cash discounts.

You must deduct all returns and allowances from your total purchases during the year.

If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. You must also charge the amount to your drawing account.

A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. As stated above, you also use it to record withdrawals of merchandise for personal or family use. This account is also known as a withdrawals account or personal account.

Line 37—Cost of Labor

Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Small merchandisers (wholesalers, retailers, etc.) usually do not have labor costs that can properly be charged to cost of goods sold. In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product.

Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages.

Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process.

Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39—Other Costs .

Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Those that are not used in the manufacturing process are treated as deferred charges. You deduct them as a business expense when you use them. Business expenses are discussed in chapter 8 .

Line 39—Other Costs

Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows.

Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. If they are not an integral part of the manufactured product, their costs are shipping or selling expenses.

Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold.

Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold.

The total of lines 35 through 39 equals the cost of the goods available for sale during the year.

Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Inventory at the end of the year is also known as closing or ending inventory. Your ending inventory will usually become the beginning inventory of your next tax year.

When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year.

7. Figuring Gross Profit

After you have figured the gross receipts from your business ( chapter 5 ) and the cost of goods sold ( chapter 6 ), you are ready to figure your gross profit. You must determine gross profit before you can deduct any business expenses. These expenses are discussed in chapter 8 .

Figure your gross profit by first figuring your net receipts. Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price.

Next, subtract the cost of goods sold (line 4) from net receipts (line 3). The result is the gross profit from your business.

You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way.

This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured.

Income Statement Year Ended December 31, 2023

The cost of goods sold for this business is figured as follows.

Items To Check

Consider the following items before figuring your gross profit.

At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. You may find it helpful to use cash registers to keep track of receipts. You should also use a proper invoicing system and keep a separate bank account for your business.

Check to make sure your records show the correct sales tax collected.

If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts.

If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income.

Compare this figure with last year's ending inventory. The two amounts should usually be the same.

If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc.), be sure to remove them from the cost of goods sold. For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6.

Check to make sure your procedures for taking inventory are adequate. These procedures should ensure all items have been included in inventory and proper pricing techniques have been used.

Use inventory forms and adding machine tapes as the only evidence for your inventory. Inventory forms are available at office supply stores. These forms have columns for recording the description, quantity, unit price, and value of each inventory item. Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. These forms will help you confirm that the total inventory is accurate. They will also provide you with a permanent record to support its validity.

Inventories are discussed in chapter 2 .

Testing Gross Profit Accuracy

If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. First, divide gross profit by net receipts. The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price.

Next, compare this percentage to your markup policy. Little or no difference between these two percentages shows that your gross profit figure is accurate. A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. You should determine the reason for the difference.

You operate a retail business. On the average, you mark up your merchandise so that you will realize a gross profit of 33 1 / 3 % on its sales. The net receipts (gross receipts minus returns and allowances) shown on your income statement are $300,000. Your cost of goods sold is $200,000. This results in a gross profit of $100,000 ($300,000 − $200,000). To test the accuracy of this year's results, you divide gross profit ($100,000) by net receipts ($300,000). The resulting 33 1 / 3 % confirms your markup percentage of 33 1 / 3 %.

If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. The result is gross business income. Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts.

8. Business Expenses

You can deduct the costs of operating your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information about the general rules for deducting business expenses, see section 162 and its regulations.

463 Travel, Gift, and Car Expenses

946 How To Depreciate Property

If someone owes you money you cannot collect, you have a bad debt. There are two kinds of bad debts—business bad debts and nonbusiness bad debts.

A business bad debt is generally one that comes from operating your trade or business. You may be able to deduct business bad debts as an expense on your business tax return.

A business bad debt is a loss from the worthlessness of a debt that was either of the following.

Created or acquired in your business.

Closely related to your business when it became partly or totally worthless.

Business bad debts are mainly the result of credit sales to customers. They can also be the result of loans to suppliers, clients, employees, or distributors. Goods and services that customers have not paid for are shown in your books as either accounts receivable or notes receivable. If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt.

If you use an accrual method of accounting, you normally report income as you earn it. You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income.

If you use the cash method of accounting, you normally report income when you receive payment. You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income.

For more information about business bad debts, see section 166 and its regulations.

All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). For more information on nonbusiness bad debts, see section 166 and its regulations.

Car and Truck Expenses

If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. You may also be able to deduct other costs of local transportation and traveling away from home overnight on business.

Local transportation expenses include the ordinary and necessary costs of all the following.

Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Tax home is defined later.

Visiting clients or customers.

Going to a business meeting away from your regular workplace.

Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.

Generally, your tax home is your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.

You operate a printing business out of rented office space. You use your van to deliver completed jobs to your customers. You can deduct the cost of round-trip transportation between your customers and your print shop.

Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. For more information, see Business Use of Your Home , later.

You are a graphic designer. You operate your business out of your home. Your home qualifies as your principal place of business. You occasionally have to drive to your clients to deliver your completed work. You can deduct the cost of the round-trip transportation between your home and your clients.

Methods for Deducting Car and Truck Expenses

For local transportation or overnight travel by car or truck, you can generally use one of the following methods to figure your expenses.

You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. The business standard mileage rate for 2023 is 65.5 cents a mile.

If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or actual expenses.

If you choose to use the standard mileage rate for a car you lease, you must use it for the entire lease period (including renewals).

You cannot use the standard mileage rate if you:

Operate five or more cars at the same time;

Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS;

Claimed a section 179 deduction on the car;

Claimed the special depreciation allowance on the car;

Claimed actual car expenses for a car you leased; or

Are a rural mail carrier who received a qualified reimbursement.

In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)

If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses.

Actual car expenses include the costs of the following items.

If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expenses based on the miles driven for each purpose.

You are the sole proprietor of a flower shop. You drove your van 20,000 miles during the year. 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense.

For more information about the rules for claiming car and truck expenses, see Pub. 463.

You can generally deduct the amount you reimburse your employees for car and truck expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see Pub. 15. That publication explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2.

Depreciation

If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. This method of deducting the cost of business property is called depreciation.

The following is a brief overview. You will find more information about depreciation in Pub. 946.

You can depreciate property if it meets all the following requirements.

It must be property you own.

It must be used in business or held to produce income. You can never depreciate inventory (explained in chapter 2 ) because it is not held for use in your business.

It must have a useful life that extends substantially beyond the year it is placed in service.

It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up.

It must not be excepted property. This includes property placed in service and disposed of in the same year.

In general, you do not depreciate the costs of repairs or maintenance if they do not improve your property. Instead, you deduct these amounts on line 21 of Schedule C. Improvements are amounts paid for betterments to your property, restorations of your property, or work that adapts your property to a new or different use.

You can make an election to treat certain repairs or replacements in your trade or business as improvements subject to depreciation. This election is available if you treat these amounts as capital expenditures on your books and records regularly used in computing your income and expenses.

The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in Pub. 946.

You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the section 179 deduction. The maximum amount you can elect to deduct during 2023 is generally $1,160,000 (higher limits apply to certain property).

This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2,890,000. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2023 is $12,200 ($20,200 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2023). Special rules apply to trucks and vans. For more information, see Pub. 946. It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction.

You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property includes any of the following.

Most passenger automobiles.

Most other property used for transportation.

Any property of a type generally used for entertainment, recreation, or amusement.

For more information about listed property, see Pub. 946.

Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.

Depreciation on property placed in service during the current tax year.

A section 179 deduction.

Depreciation on any listed property (regardless of when it was placed in service).

Employees' Pay

You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services.

To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. In addition, the pay must meet both the following tests.

The pay must be reasonable.

The pay must be for services performed.

You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business.

Some of the ways you may provide pay to your employees are listed below.

Education expenses.

Fringe benefits (discussed later).

Loans or advances you do not expect the employee to repay if they are for personal services actually performed.

Property you transfer to an employee as payment for services.

Reimbursements for employee business expenses.

Vacation pay.

A fringe benefit is a form of pay for the performance of services. The following are examples of fringe benefits.

Benefits under qualified employee benefit programs.

The use of a car.

Flights on airplanes.

Discounts on property or services.

Employee benefit programs include the following.

Accident and health plans.

Adoption assistance.

Cafeteria plans.

Dependent care assistance.

Educational assistance.

Group-term life insurance coverage.

Welfare benefit funds.

You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction.

You can generally deduct premiums you pay for the following kinds of insurance related to your business.

Fire, theft, flood, or similar insurance.

Credit insurance that covers losses from business bad debts.

Group hospitalization and medical insurance for employees, including long-term care insurance.

Liability insurance.

Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.

Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault.

Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.

Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.

Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums.

Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract.

Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.

You cannot deduct premiums on the following kinds of insurance.

Self-insurance reserve funds. You cannot deduct amounts credited to a reserve set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. However, your actual losses may be deductible. For more information, see Pub. 547.

Loss of earnings. You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. However, see item 8 in the previous list.

Certain life insurance and annuities.

For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business.

For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers.

Insurance to secure a loan. If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt.

You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family.

Generally, you can use the worksheet in the Instructions for Form 1040 to figure your deduction. However, if any of the following apply, you must use Form(s) 7206.

You have more than one source of income subject to SE tax.

You file Form 2555 (relating to foreign earned income).

You are using amounts paid for qualified long-term care insurance to figure the deduction.

See Form 8962 and its separate instructions and use Pub. 974 if the insurance plan established, or considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit.

You cannot deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.

In 2023, you signed a 3-year insurance contract. Even though you paid the premiums for 2023, 2024, and 2025 when you signed the contract, you can only deduct the premium for 2023 on your 2023 tax return. You can deduct in 2024 and 2025 the premiums allocable to those years.

You can generally deduct as a business expense some or all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.

You are legally liable for that debt.

Both you and the lender intend that the debt be repaid.

You and the lender have a true debtor-creditor relationship.

Certain taxpayers are required to limit their business interest expense deduction. See the Instructions for Form 8990 to determine whether you are required to limit your business interest expense deduction, who is required to file Form 8990, and how certain businesses may elect out of the business interest expense limitation.

You cannot deduct on Schedule C the interest you paid on personal loans. If a loan is part business and part personal, you must divide the interest between the personal part and the business part.

In 2023, you paid $600 interest on a car loan. During 2023, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% (0.60) × $600) for 2023 on Schedule C. The remaining interest of $240 is a nondeductible personal expense.

Additional items to consider are shown below.

How to allocate interest between personal and business use.

Limitation on business interest.

When to deduct interest.

The rules for a below-market interest rate loan. (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.)

Legal and Professional Fees

Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C. However, you usually cannot deduct legal fees you pay to acquire business assets. Add them to the basis of the property.

If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business.

You can deduct on Schedule C the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee.

You can also deduct on Schedule C the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee.

You can set up and maintain the following small business retirement plans for yourself and your employees.

SEP (Simplified Employee Pension) plans.

SIMPLE (Savings Incentive Match Plan for Employees) plans.

Qualified plans (including Keogh or H.R. 10 plans).

SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 16 of Schedule 1 (Form 1040). You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. You may also be able to claim a tax credit if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or SEP plan. For details on this credit and credits for auto-enrollment and military spouse participation, see Form 8881 and its separate instructions.

Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan.

For more information on retirement plans for small business, see Pub. 560.

Rent Expense

Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as a business expense only if the rent is for property you use in your business. If you have or will receive equity in or title to the property, you cannot deduct the rent.

You cannot take a rental deduction for unreasonable rents. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Rent is not unreasonable just because it is figured as a percentage of gross receipts.

Related persons include members of your immediate family, including siblings (either whole or half), your spouse, ancestors, and lineal descendants. For a list of the other related persons, see section 267 of the Internal Revenue Code.

If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home. For more information, see Business Use of Your Home , later.

Generally, rent paid in your business is deductible in the year paid or accrued. If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. You can deduct the rest of your payment only over the period to which it applies.

You can deduct on Schedule C various federal, state, local, and foreign taxes directly attributable to your business.

You can deduct on Schedule C a state tax on gross income (as distinguished from net income) directly attributable to your business. You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Do not deduct federal income tax.

You can deduct the social security, Medicare, and FUTA taxes you paid out of your own funds as an employer. Employment taxes are discussed briefly in chapter 1 . You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as taxes.

You can deduct one-half of your SE tax on line 15 of Schedule 1 (Form 1040). SE tax is discussed in chapter 1 and chapter 10 .

You can deduct on Schedule C any tax imposed by a state or local government on personal property used in your business.

You can also deduct registration fees for the right to use property within a state or local area.

You and your spouse drove your car 7,000 business miles out of a total of 10,000 miles. You and your spouse had to pay $25 for your annual state license tags and $20 for your city registration sticker. You and your spouse also paid $235 in city personal property tax on the car, for a total of $280. You and your spouse are claiming your actual car expenses. Because you and your spouse used the car 70% for business, you and your spouse can deduct 70% of the $280, or $196, as a business expense.

You can deduct on Schedule C the real estate taxes you pay on your business property. Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must assess these taxes uniformly at a like rate on all real property under its jurisdiction, and the proceeds must be for general community or governmental purposes.

Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. For information on the basis of property, see Pub. 551.

You can deduct on Schedule C all excise taxes that are ordinary and necessary expenses of carrying on your business. Excise taxes are discussed briefly in chapter 1.

Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Do not deduct these taxes as a separate item.

You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. For more information, see Pub. 510.

Travel and Meals

This section briefly explains the kinds of travel and meal expenses you can deduct on Schedule C.

These are the ordinary and necessary expenses of traveling away from home for your business. You are traveling away from home if both the following conditions are met.

Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work.

You need to get sleep or rest to meet the demands of your work while away from home.

The following is a brief discussion of the expenses you can deduct.

You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination.

You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home.

You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.

You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses ), as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.

You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. You can use actual expenses or the standard meal allowance to calculate your deduction. In most cases, you can deduct only 50% of your meal expenses. See Pub. 463 for additional information.

You can deduct the costs of dry cleaning and laundry while on your business trip.

You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices.

You can deduct the tips you pay for any expense in this list.

For more information about travel expenses, see Pub. 463.

You can generally deduct the amount you reimburse your employees for travel and meal expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see Pub. 15. That publication explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2.

Business Use of Your Home

To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.

To qualify to claim expenses for business use of your home, you must meet the following tests.

Your use of the business part of your home must be:

Exclusive (however, see Exceptions to exclusive use , later),

Regular, and

For your business.

The business part of your home must be:

Your principal place of business (defined later);

A place where you meet or deal with patients, clients, or customers in the normal course of your business; or

A separate structure (not attached to your home) you use in connection with your business.

To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your profession, so you cannot claim a business deduction for its use.

You do not have to meet the exclusive use test to the extent you use part of your home in either of the following ways.

For the storage of inventory or product samples.

As a daycare facility.

To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.

You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. To determine your principal place of business, you must consider all the facts and circumstances.

Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.

You use it exclusively and regularly for administrative or management activities of your business.

You have no other fixed location where you conduct substantial administrative or management activities of your business.

Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors.

The relative importance of the activities performed at each location.

If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location.

If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, for other ways to qualify to deduct home office expenses, see Pub. 587.

If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.

Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following.

The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)).

The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself.

Use Form 8829 , Expenses for Business Use of Your Home, to figure your deduction.

The IRS provides a simplified method to determine your expenses for business use of your home. The simplified method is an alternative to calculating and substantiating actual expenses. In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. The area you use to figure your deduction is limited to 300 square feet. For more information, see the Instructions for Schedule C.

For more information on deducting expenses for the business use of your home, see Pub. 587.

De Minimis Safe Harbor for Tangible Property

Generally, you must capitalize costs to acquire or produce real or tangible personal property used in your trade or business, such as buildings, equipment, or furniture. However, if you elect to use the de minimis safe harbor for tangible property, you may deduct de minimis amounts paid to acquire or produce certain tangible property if these amounts are deducted by you for financial accounting purposes or in keeping your books and records.

If you have an applicable financial statement, you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per item or invoice. If you do not have an applicable financial statement, you may use the de minimis safe harbor to deduct amounts paid for tangible property up to $2,500 per item or invoice.

Amounts qualifying under this de minimis safe harbor should be included as other expenses in Part V of Schedule C.

For details on making this election and requirements for using the de minimis safe harbor for tangible property, see Tangible Property Regulations .

You may also be able to deduct the following expenses.

Advertising.

Donations to business organizations.

Impairment-related expenses.

Interview expense allowances.

Licenses and regulatory fees.

Moving machinery.

Outplacement services.

Penalties and fines you pay for late performance or nonperformance of a contract.

Repairs and maintenance to real or tangible personal property.

Repayments of income.

Supplies and materials.

You usually cannot deduct the following as business expenses.

Bribes and kickbacks.

Charitable contributions.

Demolition expenses or losses.

Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs.

Entertainment expenses.

Improvements to real or tangible personal property. Improvements are amounts paid for betterments to your property, restorations of your property, or work that adapts your property to a new or different use.

Lobbying expenses.

Penalties and fines you pay to a governmental agency or instrumentality because you broke the law.

Personal, living, and family expenses.

Political contributions.

Settlements or payments related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement. You also cannot deduct attorney fees related to such settlement or payment.

9. Figuring Net Profit or Loss

After figuring your business income and expenses, you are ready to figure the net profit or net loss from your business. You do this by subtracting business expenses from business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on line 3 of Schedule 1 (Form 1040). If your expenses are more than your income, the difference is a net loss. You can usually deduct it from gross income on line 3 of Schedule 1 (Form 1040). But in some situations your loss is limited. This chapter briefly explains three of those situations. Other situations that may limit your loss are explained in the instructions for Schedule C, line G and line 32.

Your loss from a trade or business may be limited. Use Form 461 to determine the amount of your excess business loss, if any. Your excess business loss will be included as income on line 8p of Schedule 1 (Form 1040) and treated as an NOL that you must carry forward and deduct in a subsequent year.

For more information about the excess business loss limitation, see Form 461 and its instructions.

If your deductions for the year are more than your income for the year, you may have an NOL. You can use an NOL by deducting it from your income in another year or years.

Examples of typical losses that may produce an NOL include, but are not limited to, losses incurred from the following.

Your trade or business.

A casualty or theft resulting from a federally declared disaster.

Moving expenses.

Rental property.

A loss from operating a business is the most common reason for an NOL.

For details about NOLs, see Pub. 536. It explains how to figure an NOL, when to use it, how to claim an NOL deduction, and how to figure an NOL carryover.

If you do not carry on your business to make a profit, there is a limit on the deductions you can take. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit.

For details about not-for-profit activities, see Hobby or business: here’s what to know about that side hustle .

10. Self-Employment (SE) Tax

Who must pay se tax.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Use Schedule SE to figure net earnings from self-employment.

If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C (Form 1040) to figure your earnings subject to SE tax.

The 2023 SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

All of your combined wages, tips, and net earnings in 2023 are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or Medicare part of railroad retirement tax.

If your wages and tips are subject to either social security tax or the Tier 1 part of railroad retirement tax, or both, and total at least $160,200, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

A 0.9% Additional Medicare Tax may apply to you if your net earnings from self-employment exceed a threshold amount (based on your filing status). For more information, see Self-Employment (SE) Tax in chapter 1, and Form 8959 and its instructions.

Special Rules and Exceptions

Generally, resident aliens must pay SE tax under the same rules that apply to U.S. citizens. Nonresident aliens are not subject to SE tax unless an international social security agreement (also known as a totalization agreement) in effect determines that they are covered under the U.S. social security system. However, residents of the U.S. Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to SE tax, as they are considered U.S. residents for SE tax purposes. For more information on aliens, see Pub. 519, U.S. Tax Guide for Aliens.

You are not subject to SE tax if you are under age 18 and you are working for your father or mother.

If you work for a church or a qualified church-controlled organization (other than as a minister, member of a religious order, or Christian Science practitioner) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

If you are a member of the crew on a boat that catches fish or other aquatic life, your earnings are subject to SE tax if all the following conditions apply.

You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions.

The pay is not more than $100 per trip.

The pay is received only if there is a minimum catch.

The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry.

You get a share of the catch or a share of the proceeds from the sale of the catch.

Your share depends on the amount of the catch.

The boat's operating crew normally numbers fewer than 10 individuals. (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last 4 calendar quarters is fewer than 10.)

Fees you receive for services you perform as a notary public are reported on Schedule C but are not subject to SE tax (see the Instructions for Schedule SE (Form 1040)).

You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement.

You are subject to SE tax if both the following conditions are true.

You are a U.S. citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the U.S. Virgin Islands by:

A foreign government,

A wholly owned agency of a foreign government, or

An international organization.

Your employer is not required to withhold social security and Medicare taxes from your wages.

If you are a self-employed U.S. citizen or resident alien living outside the United States, in most cases you must pay SE tax. Foreign earnings from self-employment can’t be reduced by your foreign earned income exclusion when computing self-employment tax.

The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Under these agreements, you must generally only pay social security and Medicare taxes to the country in which you live. The country to which you must pay the tax will issue a certificate that serves as proof of exemption from social security tax in the other country.

For more information, see the Instructions for Schedule SE (Form 1040).

If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. A loss from one business reduces your profit from another business.

If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business.

Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. It does not matter whether the disposition is a sale, an exchange, or an involuntary conversion.

If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive.

Figuring Earnings Subject to SE Tax

Methods for figuring net earnings.

There are three ways to figure net earnings from self-employment.

The regular method.

The nonfarm optional method.

The farm optional method.

You must use the regular method to the extent you do not use one or both of the optional methods.

You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies.

You want to receive credit for social security benefit coverage.

You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)

You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)

You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)

Using an optional method could increase your SE tax. Paying more SE tax could result in your getting higher benefits when you retire.

Using the optional methods may also decrease your AGI due to the deduction for one-half of SE tax on Form 1040 or 1040-SR, which may affect your eligibility for credits, deductions, or other items that are subject to an AGI limit. Figure your AGI with and without using the optional methods to see if the optional methods will benefit you.

If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method.

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

To figure net earnings using the regular method, multiply your self-employment earnings by 92.35% (0.9235). For your net earnings figured using the regular method, see line 4a of your Schedule SE (Form 1040).

Net earnings figured using the regular method are also called actual net earnings.

Nonfarm Optional Method

Use the nonfarm optional method only for earnings that do not come from farming. You may use this method if you meet all the following tests.

You are self-employed on a regular basis. This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. For this purpose, the prior-year net earnings can be from either farm or nonfarm earnings or both.

You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be one after another.

Your net nonfarm profits were:

Less than $7,103, and

Less than 72.189% of your gross nonfarm income.

Net nonfarm profit is generally the total of the amounts from:

Line 31 of Schedule C (Form 1040); and

Box 14, code A, of Schedule K-1 (Form 1065) (from nonfarm partnerships).

However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss.

Your gross nonfarm income is generally the total of the amounts from:

Line 7 of Schedule C (Form 1040); and

Box 14, code C, of Schedule K-1 (Form 1065) (from nonfarm partnerships).

Figuring Nonfarm Net Earnings

If you meet the three tests explained earlier, use the following table to figure your nonfarm net earnings from self-employment under the nonfarm optional method.

Table 10-1. Figuring Nonfarm Net Earnings

You cannot use this method to report an amount less than your actual nonfarm net earnings from self-employment. Your actual nonfarm net earnings are your nonfarm net earnings figured using the regular method, explained earlier.

The following examples illustrate how to figure net earnings when gross nonfarm income is $9,840 or less.

Example 1. Net nonfarm profit less than $7,103 and less than 72.189% of gross nonfarm income.

You run a craft business. Your actual net earnings from self-employment were $800 in 2021 and $900 in 2022. You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method less than 5 years. Your gross income and net profit in 2023 are as follows.

Your actual net earnings for 2023 are $1,108 ($1,200 × 0.9235). Because your net profit is less than $7,103 and less than 72.189% of your gross income, you can use the nonfarm optional method to figure net earnings of $3,600 ( 2 / 3 × $5,400). Because these net earnings are higher than your actual net earnings, you can report net earnings of $3,600 for 2023.

Example 2. Net nonfarm profit less than $7,103 but not less than 72.189% of gross nonfarm income.

Assume that in Example 1 your gross income is $1,200 and your net profit is $900. You must use the regular method to figure your net earnings. You cannot use the nonfarm optional method because your net profit is not less than 72.189% of your gross income.

Example 3. Net loss from a nonfarm business.

Assume that in Example 1 you have a net loss of $700. You can use the nonfarm optional method and report $3,600 ( 2 / 3 × $5,400) as your net earnings.

Example 4. Nonfarm net earnings less than $400.

Assume that in Example 1 you have gross income of $525 and a net profit of $175. In this situation, you would not pay any SE tax under either the regular method or the nonfarm optional method because your net earnings under both methods are less than $400.

The following examples illustrate how to figure net earnings when gross nonfarm income is more than $9,840.

You run an appliance repair shop. Your actual net earnings from self-employment were $10,500 in 2021 and $9,500 in 2022. You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method less than 5 years. Your gross income and net profit in 2023 are as follows.

Your actual net earnings for 2023 are $1,108 ($1,200 × 0.9235). Because your net profit is less than $7,103 and less than 72.189% of your gross income, you can use the nonfarm optional method to figure net earnings of $6,560. Because these net earnings are higher than your actual net earnings, you can report net earnings of $6,560 for 2023.

Example 2. Net nonfarm profit not less than $7,103.

Assume that in Example 1 your net profit is $8,900. You must use the regular method. You cannot use the nonfarm optional method because your net nonfarm profit is not less than $7,103.

Assume that in Example 1 you have a net loss of $700. You can use the nonfarm optional method and report $6,560 as your net earnings from self-employment.

Use the farm optional method only for earnings from a farming business. See Pub. 225 for information about this method.

Using Both Optional Methods

If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment.

To figure your net earnings using both optional methods, you must do the following.

Figure your farm and nonfarm net earnings separately under each method. Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method.

Add the net earnings figured under each method to arrive at your total net earnings from self-employment.

You are a self-employed farmer. You also operate a retail grocery store. Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2.

Table 10-2. Example—Farm and Nonfarm Earnings

Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2.

Method 1. Using the regular method for both farm and nonfarm income.

Method 2. Using the optional method for farm income and the regular method for nonfarm income.

Method 3. Using the regular method for farm income and the optional method for nonfarm income.

Method 4. Using the optional method for both farm and nonfarm income.

Table 10-3. Example—Net Earnings

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.

Reporting SE Tax

Use Schedule SE (Form 1040) to figure and report your SE tax. If you file Form 1040 or 1040-SR, enter the SE tax on line 4 of Schedule 2 and attach Schedule SE to your form. If you file Form 1040-SS, enter the SE tax on line 3, and attach Schedule SE to your form.

Even if you file a joint return, you cannot file a joint Schedule SE. This is true whether one spouse or both spouses have earnings subject to SE tax. If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Attach both schedules to the joint return.

If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. A loss from one business will reduce your profit from another business. File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C or F for each business.

You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000. You also have a cabinetmaking business that had a net loss of $500. You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. You file one Schedule SE showing total earnings subject to SE tax of $24,500.

11. Your Rights as a Taxpayer

This chapter explains the examination, appeal, collection, and refund processes.

Examinations, Appeals, Collections, and Refunds

We accept most taxpayers' returns as filed. If we inquire about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. We may close your case without change or you may receive a refund.

The process of selecting a return for examination usually begins in one of two ways. One way is to use computer programs to identify returns that may have incorrect amounts. These programs may be based on information returns, such as Forms 1099 and W-2; on studies of past examinations; or on certain issues identified by other special projects. Another way is to use information from compliance projects that indicates that a return may have incorrect amounts. These sources may include newspapers, public records, and individuals. If we determine that the information is accurate and reliable, we may use it to select a return for examination.

Pub. 556, Examination of Returns, Appeal Rights, and Claims for Refund, explains the rules and procedures that we follow in examinations. The following sections give an overview of how we conduct examinations.

We handle many examinations and inquiries by mail. We will send you a letter with either a request for more information or a reason why we believe a change to your return may be needed. You can respond by mail or you can request a personal interview with an examiner. If you mail us the requested information or provide an explanation, we may or may not agree with you, and we will explain the reasons for any changes. Do not hesitate to write to us about anything you do not understand.

If we notify you that we will conduct your examination through a personal interview, or you request such an interview, you have the right to ask that the examination take place at a reasonable time and place that is convenient for both you and the IRS. If our examiner proposes any changes to your return, they will explain the reasons for the changes. If you do not agree with these changes, you can meet with the examiner's supervisor.

If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, contact us as soon as possible so we can see if we should discontinue the examination.

If you do not agree with the examiner's proposed changes, you can appeal them to the IRS Independent Office of Appeals. Most differences can be settled without expensive and time-consuming court trials. Your appeal rights are explained in detail in both Pub. 5, Your Appeal Rights and How to Prepare a Protest if You Disagree, and Pub. 556.

If you do not wish to use the Appeals Office or disagree with its findings, you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or the U.S. District Court where you live. If you take your case to court, the IRS will have the burden of proving certain facts if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. If the court agrees with you on most issues in your case and finds that our position was largely unjustified, you may be able to recover some of your administrative and litigation costs. You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave us the information necessary to resolve the case.

Pub. 594, The IRS Collection Process, explains your rights and responsibilities regarding payment of federal taxes. It describes the following.

What to do when you owe taxes. It describes what to do if you get a tax bill and what to do if you think your bill is wrong. It also covers making installment payments, delaying collection action, and submitting an offer in compromise.

IRS collection actions. It covers liens, releasing a lien, levies, releasing a levy, seizures and sales, and release of property.

IRS certification to the State Department of a seriously delinquent tax debt, which will generally result in denial of a passport application and may lead to revocation of a passport.

Your collection appeal rights are explained in detail in Pub. 1660, Collection Appeal Rights.

Generally, both you and your spouse are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on your joint return. To seek relief from any liability related to your spouse (or former spouse), you must file a claim on Form 8857, Request for Innocent Spouse Relief. In some cases, Form 8857 may need to be filed within 2 years of the date on which the IRS first attempted to collect the tax from you. Do not file Form 8857 with your Form 1040 or 1040-SR. For more information, see Pub. 971, Innocent Spouse Relief, and Form 8857, or you can call the Innocent Spouse office toll free at 855-851-2009.

Generally, the IRS will deal directly with you or your duly authorized representative. However, we sometimes talk with other persons if we need information that you have been unable to provide, or to verify information we have received. If we do contact other persons, such as a neighbor, bank, employer, or employees, we will generally need to tell them limited information, such as your name. The law prohibits us from disclosing any more information than is necessary to obtain or verify the information we are seeking. Our need to contact other persons may continue as long as there is activity in your case. If we do contact other persons, you have a right to request a list of those contacted. Your request can be made by telephone, in writing, or during a personal interview.

You can file a claim for refund if you think you paid too much tax. You must generally file the claim within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. Pub. 556 has more information on refunds.

If you were due a refund but you did not file a return, you must file a refund claim within 2 years from the time the tax was paid to get that refund. The law generally provides for interest on your refund if it is not paid within 45 days of the date you filed your return or claim for refund.

12. How To Get More Information

This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Your options for preparing and filing your return online or in your local community, if you qualify, include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using software or Free File Fillable Forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE or download the free IRS2Go app for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource ( MilitaryOneSource.mil/MilTax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then e-filed regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4App ) makes it easier for you to estimate the federal income tax you want your employer to withhold from your paycheck. This is tax withholding. See how your withholding affects your refund, take-home pay, or tax due.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on the most recent tax changes and interactive links to help you find answers to your questions.

You may also be able to access tax information in your e-filing software.

There are various types of tax return preparers, including enrolled agents, certified public accountants (CPAs), accountants, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving taxpayers with limited-English proficiency (LEP) by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), most IRS offices, and every VITA/TCE tax return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.). The Accessibility Helpline does not have access to your IRS account. For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp .

Form 9000, Alternative Media Preference, or Form 9000(SP) allows you to elect to receive certain types of written correspondence in the following formats.

Standard Print.

Large Print.

Audio (MP3).

Plain Text File (TXT).

Braille Ready File (BRF).

Go to IRS.gov/DisasterRelief to review the available disaster tax relief.

Go to IRS.gov/Forms to view, download, or print all the forms, instructions, and publications you may need. Or, you can go to IRS.gov/OrderForms to place an order.

Download and view most tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

With an online account, you can access a variety of information to help you during the filing season. You can get a transcript, review your most recently filed tax return, and get your adjusted gross income. Create or access your online account at IRS.gov/Account .

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. For more information, go to IRS.gov/TaxProAccount .

The safest and easiest way to receive a tax refund is to e-file and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages (including shortened links), telephone calls, or social media channels to request or verify personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

Payments of U.S. tax must be remitted to the IRS in U.S. dollars. Digital assets are not accepted. Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit Card, Credit Card, or Digital Wallet : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can now upload responses to all notices and letters using the Document Upload Tool. For notices that require additional action, taxpayers will be redirected appropriately on IRS.gov to take further action. To learn more about the tool, go to IRS.gov/Upload .

You can use Schedule LEP (Form 1040), Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language. You may not immediately receive written communications in the requested language. The IRS’s commitment to LEP taxpayers is part of a multi-year timeline that began providing translations in 2023. You will continue to receive communications, including notices and letters, in English until they are translated to your preferred language.

Keep in mind, many questions can be answered on IRS.gov without visiting a TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS strives to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . To find your advocate’s number:

Go to TaxpayerAdvocate.IRS.gov/Contact-Us ;

Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available at IRS.gov/pub/irs-pdf/p1546.pdf ;

Call the IRS toll free at 800-TAX-FORM (800-829-3676) to order a copy of Pub. 1546;

Check your local directory; or

Call TAS toll free at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to TAS at IRS.gov/SAMS . Be sure to not include any personal taxpayer information.

LITCs are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, go to the LITC page at TaxpayerAdvocate.IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List , at IRS.gov/pub/irs-pdf/p4134.pdf .

Small Business Administration

The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. The SBA also has publications and videos on a variety of business topics. The following briefly describes assistance provided by the SBA.

SBDCs provide counseling, training, and technical services to current and prospective small business owners who cannot afford the services of a private consultant. Help is available when beginning, improving, or expanding a small business.

SCORE provides small business counseling and training to current and prospective small business owners. SCORE is made up of current and former business people who offer their expertise and knowledge to help people start, manage, and expand a small business. SCORE also offers a variety of small business workshops.

You can visit the SBA website at SBA.gov . While visiting the SBA website, you can find a variety of information of interest to small business owners.

Call the SBA Answer Desk at 800-U-ASK-SBA (800-827-5722) for general information about programs available to assist small business owners.

You can walk in to an SBDC to request assistance with your small business. To find the location nearest you, visit the SBA website or call the SBA Answer Desk.

Other Federal Agencies

Other federal agencies also publish publications and pamphlets to assist small businesses. Most of these are available from the Superintendent of Documents at the U.S. Government Publishing Office. You can get information and order these publications and pamphlets in several ways.

You can visit the GPO website at Catalog.GPO.gov .

Write to the GPO at the following address.

Call the GPO toll free at 866-512-1800 or at 202-512-1800 from the Washington, DC, area.

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The 5 years before retirement are critical for Americans — here's why plus what you can do to avoid tarnishing your golden years

We adhere to strict standards of editorial integrity to help you make decisions with confidence. Some or all links contained within this article are paid links.

While it’s always a good idea to start planning for retirement as early in your career as possible, the five years before retirement are often considered the most critical. By getting a handle on where you stand today, you’ll have a better understanding of what that means for your financial wellbeing in retirement.

But get it wrong, and it could tarnish your golden years.

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In addition to developing a budget for retirement, it’s a good time to revisit your retirement plans and goals — after all, things change. When you were younger, maybe you dreamt of traveling the world, but now you’re more interested in living abroad. Or, you might want to move to another city or state to be closer to your children or grandchildren.

Here’s how you can plan ahead in the lead up to your retirement.

Get ducks in order

If you’re not on track with your finances, there’s still time to adjust your investments.

That might mean bumping up your savings rate (and cutting back on some of your current expenses). It might also mean looking for supplemental income, such as working overtime or finding a side hustle.

This is also a good time to sit down with your financial adviser to make sure your asset allocation suits your retirement timeline. For example, you might want to consider making adjustments that will lower your risk.

With Advisor.com , getting set up with a suitable — and professionally-vetted— advisor is easy.  All you need to do is answer a few questions about your financial situation and goals, and they'll match you with a range of advisors.

Plus, you can reach out for a completely free consultation to ensure you find the right fit.

Certain tax planning strategies could also help. For instance, you can put your savings in a gold IRA with help from American Hartford Gold .

By opting for a Gold IRA , you can diversify your portfolio and stabilize your finances with the inflation-hedging properties of gold and the tax advantages of a traditional IRA.

Passive Income and budgeting during retirement

Once you revisit your plans and goals, you can figure out if you’re retirement-ready. By developing a budget, you can figure out if you’re on track with your retirement savings.

A platform such as Empower can help you organize your budget simply. Empower offers a unique digital suite of finance tools designed to help you stay on top of your finances.

When you sign up for Empower, you have access to a free financial dashboard where you can keep track of all your accounts in one place.

You’ll also need to figure out how much you’ll bring in during retirement, including your Social Security benefit, pension, retirement savings and any other sources of income.

Read more: ‘They are awful’: Dave Ramsey is fed up with millennials and Gen Z who he claims don't work but want to own homes — here’s what he says you need to be a ‘successful' investor

One potential extra source of retirement income is commercial real estate, which has proven to offer portfolio diversification, liquidity and passive income.

First National Realty Partners allows accredited individual investors to access institutional-quality commercial real estate investments — without the leg work of finding deals yourself.

FNRP’s secure online platform makes investing in commercial real estate convenient and simple. You can engage with experts, explore available deals, and easily make an allocation in an all-in-one personalized portal.

You might also consider investing in residential real estate as a way to supplement your retirement income. An increased demand for affordable single-family rentals has created an opportunity for those looking to for income-generating investments.

Those looking to get in on this trend should look at Fundrise , which lets everyday investors access an extensive portfolio of private real estate investments.

With investments starting at $10 , you gain access to Fundrise’s unique eREITs, made up of hundreds of well-located, highly-vetted residential real estate assets.

Plan for health care expenses

One of your biggest expenses in retirement could be healthcare. If you retire before 65 (when Medicare, the federal health insurance program, becomes available), then you’ll need to make sure you’re covered by private insurance, employer benefits or a spouse’s plan.

Those expenses won’t disappear when you become eligible for Medicare. A 65-year-old “can expect to spend an average of $157,500 in healthcare and medical expenses throughout retirement,” according to Fidelity’s annual Retiree Health Care Cost Estimate for 2023. And that’s with Medicare coverage.

Do your research ahead of time: Learn how the program works, what it covers, what it doesn’t cover and when you need to sign up. For example, if you miss the enrollment period, you’ll have to pay a penalty. You may want to consider purchasing a life insurance policy so you have a plan set up to keep your loved ones secure in case the worst happens.

Term life insurance offers flexibility when you're seeking affordable coverage while balancing other financial responsibilities.

By opting for term life insurance through an online provider like SBLI , you can protect your family in case of emergency.

With SBLI, you gain access to features such as LegacyShield, which can ease your mind during end-of-life planning. LegacyShield is a streamlined dashboard where you can manage all your financial accounts, store documents and share final wishes all in one place.

SBLI can help you protect your family's financial future with the support of professional advice, a simple online claims process and no medical exams required for term insurance.

What to read next

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

Don't call them DINKs. Many childfree adults are ALICEs.

• DINKs are known for having disposable income, but some childfree adults are also struggling.
• In fact, many childfree adults are ALICEs — asset-limited, income-constrained, and employed.
• Without dependents, many low-income workers have a harder time accessing tax credits and government assistance.

America's DINKs — dual-income couples with no children — are known for having disposable income and spending their paychecks on major investments, luxury vacations , and early retirement .

These households have previously told Business Insider that they can spend extra money on their lifestyle because they don't have any child-related costs. By definition, DINKs aren't necessarily rich , but they do have a reputation for living a life of freedom and excess cash.

A growing number of child - free adults , however, are falling through the cracks of the US economy. Many low-income childfree adults fall into the ALICE category — people who are asset-limited, income-constrained, and employed. Twenty-nine percent of US households make too much to qualify for government assistance but not enough to comfortably afford daily life . And ALICEs who aren't parents face unique challenges: it is especially difficult to qualify for financial help or tax credits without young children, even if you need the help.

According to a report published in April by the Brookings Institution, the US doesn't have a strong financial safety net to support childfree ALICEs. This is partly because having financially dependent children is a prerequisite of some government assistance programs .

Poor, non-elderly adults who are not raising children and don't qualify for disability benefits made up nearly 106 million people in 2017, according to a Census analysis . What's more, they have a higher risk of experiencing homelessness and long-term poverty, per the Brookings report.

Low-income adults without children face barriers to government assistance

Low-income, childfree adults have a higher likelihood of falling into poverty, and often stay in poverty long-term because they can't access assistance, wrote Robert Greenstein, the author of the Brookings report.

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"The safety net for these non-elderly childless adults is so limited, those non-elderly adults who are poor tend to be poorer than others living in poverty," wrote Greenstein, who is also a visiting fellow of economic studies for the Brookings Institution, which is affiliated with The Hamilton Project, an economic policy initiative.

The report found that half of the Americans living in "deep poverty" — those with incomes that are at or below 50% of the poverty line, which is $7,290 annually for one person — are childfree adults not receiving disability benefits.

Greenstein wrote that this population is at a disadvantage when applying for government support, especially as it comes to tax credits and housing assistance, even if their household income is low.

For example, they don't qualify for the child tax credit , which allows families with dependents to receive thousands of dollars in tax breaks each year. The Earned Income Tax Credit — which offers refundable tax credits for low- and moderate-income workers — is also very limited for childfree employees, who receive fewer than 4% of the EITC's overall benefits, according to the Brookings report.

Greenstein also wrote that over 7 million low-income adults who are between the ages of 18 to 61 and don't live with minors pay more than 50% of their income on rent — making them severely rent-burdened. The majority of these adults don't receive any state or federal rental assistance.

Additionally, parents can more easily access SNAP food benefits than childfree adults because they are exempt from having to work a required amount of hours each week to receive assistance.

Many Social Security and Medicare programs also primarily offer assistance to older adults, excluding adults under 62.

Although strengthening the US financial safety net for this population is complex, Greenstein offered a few solutions. He suggested expanding the Earned Income Tax Credit to benefit more adults without children, along with removing the extra qualifications childfree adults must meet to access SNAP benefits.

An expansion of Medicaid through the Affordable Care Act would also allow more adults to get the healthcare they need — even if they don't qualify for disability benefits or Social Security, Greenstein said.

Are you making an income above the poverty line but still struggling to afford daily life? Have you faced challenges qualifying for government assistance because you don't have children? Reach out to this reporter at [email protected] .

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Can a business pay for employees' individual health insurance plans?

Health Benefits • May 14, 2024 at 9:58 AM • Written by: Holly Bengfort

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In today's ever-evolving workforce, business owners are constantly looking for new ways to attract and retain top talent . Instead of offering a costly group health plan, one tactic they may consider is offering to pay employees' individual health insurance costs .

While it may seem like a generous and attractive perk for employees, employers need to consider several factors before deciding to pay for individual health insurance plans. From costs and tax implications to legal requirements and employee preferences, navigating this benefit option can be complex.

In this article, we'll go over a better type of employer-sponsored health benefit that allows you to reimburse your employees for their healthcare costs instead of paying premiums directly.

Takeaways from this blog post: Under the ACA, an employer cannot directly pay for an employee’s health insurance premiums. Employers do have the option to reimburse employees on a tax-free basis for more than 200 eligible medical costs, including healthcare premiums, through an HRA. By offering to reimburse employees for their individual health plan coverage, businesses can provide a valuable benefit that helps boost recruitment and retention.

Are you a small employer? Get our guide on how to offer health benefits with a tight budget.

How business owners can pay for individual health insurance plans

Historically, organizations could pay for employees’ individual health insurance premiums directly. However, the Affordable Care Act (ACA) changed this. IRS Notice 2015-17 1 clarified information about employer payment plans (EPPs) and whether employers could pay for employees’ individual health insurance plans.

Because the IRS and ACA consider EPPs group plans, they must meet ACA standards. Since EPPs can’t integrate with individual health insurance plans, they don’t satisfy the ACA. Offering an EPP could subject you to fines if you have 50 or more full-time equivalent employees (FTEs).

Thankfully, federal law allows employers to reimburse employees for their monthly premiums for individual health insurance policies, as long as it's done through a compliant health reimbursement arrangement (HRA). This allows employees to choose a health insurance plan that best fits their individual needs while still receiving financial assistance from their employer.

HRA vs. traditional group health insurance

Employers often associate employee health insurance with a group health plan. When employers purchase a group policy, they offer their employees and dependents coverage. Employees have the option to enroll or decline coverage, with most plans requiring a minimum participation rate of 70%. From there, the employer and employee split the health insurance premiums . This isn't always a problem for larger companies with big budgets, but it can put a strain on small business owners.

HRAs are the more cost-effective health insurance option. An HRA is an employer-funded health benefit that reimburses employees tax-free for out-of-pocket medical expenses . With a stand-alone HRA, employers can reimburse employees for their insurance premium costs instead of buying the health plan coverage for them. This is especially beneficial in states where individual coverage is cheaper than group coverage.

How an HRA works

HRAs aren't as complicated as they may seem. Each type of HRA follows the same basic steps.

Here's a breakdown of the HRA process:

• The employer sets aside a specific amount of tax-free money for each employee.
• Employees pay for medical expenses such as health insurance, doctor visits, prescriptions, and other healthcare services using their own money.
• They submit proof of those out-of-pocket costs to their employer for reimbursement.
• Once the employer or third-party administrator approves the expense, employers reimburse employees up to their allowance amount. Employers can reimburse employees on a pre-tax basis for more than 200 medical expenses listed in IRS Publication 502 and the CARES Act.

Common types of HRAs

There are a few different types of HRAs that businesses can offer to reimburse employees for their individual health insurance plans, including the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA).

This chart shows how they compare.

How HRAs benefit employers

HRAs are employer-friendly for two reasons: they offer tax advantages and work with all budgets.

Under an HRA, reimbursements are exempt from payroll taxes for employers. Employees enrolled in a policy that meets minimum essential coverage (MEC) requirements, such as a plan from state or federal health insurance marketplaces, can participate in the HRA, meaning they also receive tax-free reimbursements.

Unlike a traditional group health plan, an HRA isn't subject to unpredictable rate increases or strict participation requirements. They're a more affordable alternative since employers control their own budgets. They set a monthly allowance that they can afford, so they can offer employees as much or as little as they choose.

John F. Pace is a CPA at Pace & Associates 2 with more than 40 years of experience. He's observed various business insurance structuring scenarios, including the intricate ways employers handle health insurance. He finds HRAs beneficial because they offer greater flexibility and tax benefits.

"For example, in one instance at my firm, we transitioned a client from a traditional group insurance plan to an HRA," Pace said. "This change not only streamlined their benefits administration but also resulted in notable cost savings, echoing similar benefits to the ones I managed during my tenure overseeing family trusts and associated commercial properties, where every financial decision impacted broader estate and tax planning strategies."

How HRAs benefit employees

In today's competitive labor market, offering competitive benefits is crucial for attracting top talent. Employers also need to keep job satisfaction high if they want to discourage their current employees from looking for better opportunities elsewhere.

PeopleKeep's 2024 Employee Benefits Survey found that 81% of employees said an employer’s benefits package is an important factor in whether or not they accept a job. Another 92% of employees said that health benefits are an important employee benefit.

While a traditional group health plan can satisfy this need, it's a one-size-fits-all approach that groups your employees together. HRAs promote individuality since your employees can pick the health insurance plans that meet their specific wants and needs. In addition to having their health insurance premiums reimbursed, they can also submit other eligible healthcare expenses for reimbursement, resulting in additional savings.

How PeopleKeep can help

If you’re new to offering HRAs, PeopleKeep can help. We specialize in HRA administration, helping thousands of employers easily reimburse their employees with our hassle-free software. Our team of experts generates legal plan documents, reviews employee expenses based on IRS guidelines, and sends necessary notices automatically for your convenience. This frees up more time for you to focus on running your business.

Healthcare costs are on the rise, and many employers are seeking out more affordable healthcare coverage options for their employees. An HRA is an excellent alternative to a costly group health plan. With a QSEHRA or an ICHRA, employers can reimburse employees for their individual health insurance coverage on a pre-tax basis. Providing reimbursement for employees' individual health insurance plans can be a cost-effective and attractive benefit for businesses looking to take care of their employees' well-being while staying within their budgets.

This article is for information purposes only. It's important for businesses to consult with legal and financial professionals to ensure compliance with applicable laws and regulations when implementing this type of benefit.

This article was originally published on April 23, 2013. It was last updated on May 14, 2024.

• https://www.irs.gov/pub/irs-drop/n-15-17.pdf
• https://pace.cpa/

New to HRAs? Learn which is best for you in our comparison chart.

Holly Bengfort

Holly is a content marketing specialist for PeopleKeep. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. As an anchor and reporter, she communicated complex stories to the vast communities she served on a daily basis. Her background has given her a greater understanding of people and the issues that affect our lives. When Holly isn’t writing, she enjoys reading, exercising, and spending time at the beach.

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Startup Business Insurance - What You Need to Know

11 Minutes Read

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Empower Your Startup with Tailored Business Insurance Solutions

Antonio Del Cueto, CPA

May 10, 2024

In the fast-paced world of startups, insurance often gets sidelined as a mere legal formality—a checkbox to tick on the long list of entrepreneurial duties. But what if insurance for your startup isn't just a safety net but a secret weapon that can dramatically enhance your business's credibility, attract top-tier talent, and even lure discerning investors?

In this article, discover how adopting a proactive approach to getting insurance for your startup can uncover hidden advantages, challenge the norms, and set your venture apart in a competitive ecosystem. Turn this mandatory expense into a strategic choice as the smartest move you haven't made!

Further reading: Find Free Funding: Small Business Grant Opportunities for Startups

What is Startup Business Insurance?

Definition of startup business insurance.

Startup business insurance is a specialized form of coverage designed to address new businesses' specific needs and challenges. This insurance helps mitigate the risks of running a startup by providing financial protection against various potential issues that could impact the company's operation and growth. Ensuring you have the right insurance safeguards your startup's future.

Why Startups Need Insurance

1. protection from legal actions.

Like all businesses, startups are susceptible to legal challenges that can arise from various sources, including employee claims, customer injuries, or compliance issues. Insurance covering legal expenses can protect your startup from significant financial damage.

2. Ensuring Business Continuity

Policies such as business interruption insurance can protect against losses incurred due to unexpected events that halt normal business operations. This coverage is necessary to ensure your startup can continue operating under adverse conditions.

3. Meeting Legal and Contractual Requirements

Some types of insurance are legally required, such as workers' compensation. Also, clients or landlords may require certain types of insurance in contracts, making it essential for maintaining business relationships.

4. Attracting Investment

Proper insurance signifies that a startup is managing its risks intelligently. Investors are more likely to fund startups with comprehensive risk management strategies , including adequate insurance coverage.

Further reading: What You Should Know About Business Insurance for Startups

How are insurance expenses reported in bookkeeping.

Insurance costs are tracked in two parts: prepaid insurance and insurance expense. Paying a premium is initially recorded as a prepaid asset because coverage extends into future periods.

Over time, as that coverage is used up (each month for a yearly policy, for instance), a portion of the prepaid insurance is converted into an expense. This expense reduces your company's profit for that period.

This method ensures expenses are matched to the time they benefit, giving an accurate picture of your business's financial health.

How to Purchase Insurance for Your Startup

1. working with an insurance agent.

An experienced insurance agent can guide you through selecting the right insurance for your startup. They can offer customized insurance offers to meet your startup’s needs and explain complex terms and conditions.

2. Calculating the Average Cost

The insurance cost varies widely depending on many factors, including the industry, company size, and the types of coverage required. Startup founders must budget for these costs necessary to protect against potential financial disasters.

3. Implementing Policies in Place

Once the right policies are selected, putting these policies in place involves working with your agent to ensure all aspects of your business are covered. Regular review and policy adjustments may be required as your business grows and evolves.

Types of Risks and Liabilities Covered by Startup Business Insurance

Operational risks.

Business Interruption Insurance: This coverage is essential for maintaining business income following a disaster. It helps startups manage expenses and recover from the interruption smoothly.

Commercial Property Insurance: Protects the physical assets of a startup , such as office spaces, equipment, and technology, against property damage due to fires, storms, or other disasters.

Legal Liabilities

General Liability Insurance: Covers third-party lawsuits for bodily injury, property damage, and personal injury, ensuring your startup can handle legal costs and damages.

Professional Liability Insurance (Errors and Omissions Insurance, E&O): This type of business insurance is critical for startups that provide professional services. It covers them against negligence claims and errors and omissions that could lead to client losses.

Directors and Officers Insurance (D&O): Protects the personal assets of your startup’s directors and officers if they are sued for wrongdoing in managing the business. This is vital for attracting and retaining top talent in leadership positions.

Financial Risks

Cyber Liability Insurance: As cyber threats grow, protecting against data breaches and other internet-based risks is vital, especially for tech companies handling sensitive customer information such as social security numbers.

Employee-Related Risks

Workers Compensation Insurance: This policy is mandatory in most US states and covers medical costs and lost wages for injured employees.

Additional Coverages:

Business Owners Policy (BOP): A package policy that combines property and liability coverage. This policy can often be tailored to meet the specific insurance needs of startups, making it a cost-effective and comprehensive insurance solution.

How to Choose the Right Insurance for Your Startup

Industry-specific risks.

The industry your startup operates in will largely determine the risks you face and, consequently, the types of insurance you need. For tech startups, E&O insurance (errors and omissions) and cyber liability are critical, whereas commercial insurance covering physical assets is integral for manufacturing businesses.

Size and Scale of Operations

The size of your startup affects the extent of coverage needed. Smaller startups might benefit from a basic coverage package, while larger enterprises might require more comprehensive policies to cover various aspects of their operations.

Legal and Regulatory Requirements

Depending on your location and industry, your startup may need to have mandatory insurance policies in place. This includes workers comp for your employees and, in some cases, auto insurance if company vehicles are used.

Future Growth Plans

Consider how your insurance needs may evolve as your startup grows. You might start with a basic startup insurance package and scale up to more extensive coverage as you expand your products and services.

Financial Constraints

Balance the insurance cost against your startup’s budget. Finding a premium, you can afford without compromising on necessary coverage is important. Tools like Taxfyle can provide quotes to help you estimate what to expect to pay.

Asset Protection

Evaluate the total value of your business property to determine how much insurance coverage you need to protect against potential losses due to damage or theft.

Liability Considerations

Assess the degree of liability risk associated with your startup’s products and services. This is vital if your startup gets sued. Having adequate liability coverage can protect against significant legal expenses.

The Role of Insurance Brokers and Agents

Expert guidance.

Brokers and agents from leading insurance companies offer tailored advice based on an in-depth understanding of the insurance industry. They can guide startup founders through selecting the right insurance for their startup, ensuring that all potential risks are covered.

Customization of Insurance Packages

Insurance professionals can develop a customized insurance package that meets the specific needs of your startup. This might include combining general liability, professional liability, and property insurance into a single business insurance policy.

Assistance with Comparison and Selection

Agents and brokers can compare offers from various insurers to find the best rates and coverage, thus helping you make an investment that offers financial protection without overextending your startup’s budget.

Support with Policy Management and Claims

As your startup evolves, your insurance needs will change. An experienced agent can help you adjust your policies as required and assist with the claims process, ensuring that your startup receives the benefits it needs when needed.

Risk Management Consulting

Beyond just selling insurance, some agents provide risk management consulting to help you understand and mitigate potential risks before they become issues.

Key Takeaways

• Essential Coverage : Depending on how much protection your startup needs, getting a life insurance policy can safeguard your venture, providing essential coverage for unforeseen risks.
• Tailored Solutions : Insurance for your startup offers customizable policies, ensuring you get the coverage you need to protect your business and its assets.
• Risk Management : Getting the right insurance can mitigate liabilities and property damage, providing peace of mind as you build your startup.
• Legal Compliance : It's essential to have insurance for your startup to comply with regulations and establish credibility with stakeholders.
• Learn More : Explore related articles to understand the importance of insurance for startups and how it can benefit your business.

How can Taxfyle help?

Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.

At Taxfyle , we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

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Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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Today's Paper | May 17, 2024

Govt plans to end exemptions, tax tribal areas.

ISLAMABAD: Pakistan’s top tax machinery is working on several proposals to eliminate tax exemptions worth billions of rupees in the Budget 2024-25 as prerequisites to secure an agreement with the International Monetary Fund on a new bailout package, Dawn learnt from official sources on Thursday.

The Federal Board of Revenue (FBR) has prepared a document for tax exemption withdrawal based on internal workings. It focuses on sales tax exemptions and tax exemptions available to people in former federally administered tribal areas and provincially administered tribal areas while paying little attention to immovable properties, undocumented non-corporate businesses, the transportation sector, and construction businesses.

Well-placed sources in the FBR told Dawn the tax exemption withdrawal is primarily focused on sales tax. The overall amount of sales tax exemption anticipated by the FBR is more than Rs1.3 trillion. Most tax exemptions are for petroleum, food, pharmaceutical, and milk products.

The IMF has suggested imposing a sales tax on petroleum items, which the federal government is unwilling to do. The National Finance Commission’s (NFC) spirit was tarnished by the federal government’s decision to impose a petroleum development levy (PDL) while ceasing to collect sales taxes on petroleum products since 2022.

Mulls reducing income slabs with rate hikes for salaried class

According to the FBR, the exemption cost on petroleum products through various SROs was calculated at Rs633bn in FY23. This cost will rise significantly once the calculations for the current fiscal year are finalised.

In FY24, PDL collection totalled Rs729 billion in the first nine months, against the full-year target of Rs869bn. Provinces were denied this significant collection under the NFC award since PDL is non-transferable.

The federal cabinet will decide whether to impose a sales tax on petroleum products or to continue with the exemptions while raising the PDL limit further to generate additional revenue for the federal budget.

In the sales tax, FBR has also estimated an exemption cost of Rs8bn on pulse imports and another Rs20bn on rice, wheat, and wheat flour imports. The cabinet will decide whether to withdraw these exemptions.

There is also another Rs60bn in food supply exemption costs, and the FBR is striving to decrease this exemption cost by hiking tax rates on certain products. Pesticide sales tax exemption costs total more than Rs17bn. The cost of sales tax exemption on second-hand clothing and footwear imports is projected to be Rs5bn, and CBU automobiles at Rs4bn.

Since 2018, the 7th NFC Award has been violated by depriving the FATA of their rights. Instead of providing the promised development money of Rs100 billion per year, the FBR has proposed to the finance minister that income tax be imposed on individuals residing in tribal areas of KP and Balochistan.

Income tax waivers

According to FBR estimates, income tax exemptions for tribal areas in KP and Balochistan totalled Rs10bn, while sales tax exemptions for importing machinery and other parts for industrial installation in tribal areas totaled Rs17bn in FY23.

On Thursday, Finance Minister Muhammad Aurangzeb informed the National Assembly that income tax would be imposed on tribal areas. However, opposition members from KP and Balochistan warned of larger protests than those in Azad Jammu and Kashmir.

The minister agreed to engage with opposition members to discuss the proposed extension of income tax law to the tribal areas.

Under the Income Tax Law, the FBR seeks to reduce at least one tax slab for salaried individuals while increasing tax rates. If the cabinet approves the FBR’s plan, this proposed action will increase the tax burden on the salaried class.

Donations/charities

Individuals who earn from energy power generation projects benefit the most from income tax exemptions. This amount is estimated to be Rs57bn in the tax year 2023. The tax credit for charitable donations is anticipated to be more than Rs5bn, and the deductible allowance for zakat is almost Rs2bn. Most charities are owned and operated by politicians and corporate leaders who benefit from tax breaks.

The cost of a lower income tax rate for distributors of cigarettes and pharmaceutical products is estimated to be Rs15bn in tax year 2023, with an additional Rs7 billion due to a lower rate for distributors, dealers, sub-dealers, wholesalers, and retailers of fast-moving consumer goods, fertilisers, and electronics.

Published in Dawn, May 17th, 2024

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