Income or Loss from Business Operations
The fees you earn for your services or the receipts you collect from the sale of goods are the bread-and-butter income of your business. Hopefully your pricing policies are realistic and you have a strong customer or client base so that you can make a profit.
Even if sales are healthy, expenses can outrun receipts, resulting in a loss for the business. You will not know whether you have a net income or loss until all of the expenses discussed throughout the book have been taken into account. If there is a net loss, then limitations may come into play on when and the extent to which business losses can be deducted.
It is now harder for businesses to hide income (not report it) because of reporting requirements for transactions made on credit and debit cards. The processors must report to the IRS and to merchants the annual transactions, although there is an exception for small merchants (see Appendix A).
Special limits on losses from sideline businesses (“hobby loss rules”) are discussed in Chapter 26.
For further information about business income and losses, see IRS Publication 225, Farmer's Tax Guide