Operating income from a business may include certain investment-type income, such as interest on business bank accounts and rents from leasing property. Pass-through entities segregate investment-type income and, in most cases, report these separately to owners. How to report this income can be found later in this chapter. Capital gains are discussed in Chapter 5 and other gains from the sale of business property are discussed in Chapter 6.
Interest received on business bank accounts and on accounts or notes receivable in the ordinary course of business is a common type of ordinary business income. If the business lends money, interest received on business loans is business income. Deductions for business loans that go sour are explained in Chapter 22.
Businesses that make below-market or interest-free loans may be deemed to receive interest, called imputed interest. Below-market loan rules from the deduction perspective are discussed in Chapter 13.
Businesses that own stock in a corporation may receive dividends. C corporations report the dividends as ordinary income. Pass-through entities report the dividends as separately stated items to enable owners to apply favorable tax rates on their personal returns. For example, if the dividends are “qualified,” owners may pay tax at no more than 15% on their share of the dividends.
C corporations that receive dividends from domestic (U.S.) corporations can ...