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What is Taxable & Non-Taxable Income?

What is Taxable & Non-Taxable Income?

You can receive income in the form of money, goods, or services. This section deals with several types of taxable and non-taxable income. It includes discussions on employee salaries and benefits and barter income, partnerships, S corporations, and royalties. Other steps may be appropriate for your specific type of business.

Usually, an amount included in income is taxable unless it is expressly exempted by law. Taxable income must be declared in the tax return and is taxable. You may need to show your income tax-free on your tax return, but it is not taxable.

 

Constructively-received income

The income available to you is generally taxed whether or not it is in your possession.

A valid check that you received or made available before the end of the fiscal year is considered income constructively for that year, even if you do not cash the check or deposit it in your account until the following year. For example, if the postal service tries to deliver a check to you on the last day of the fiscal year, but you are not at home to receive it, the amount should be included in your income for that fiscal year. If the check was mailed in such a way that it cannot reach you after the end of the fiscal year and you cannot get the funds until the end of the year, include the amount in your income for the next year.


Assignment of Income 

The income an agent receives on your behalf is the income that you deemed to have received during the year in which the agent received it. If you contractually agree that a third party will collect income for you, you must include the amount in your income when the party collects it.

Example: You and your employer agree that part of your salary will be paid directly to your ex-spouse. You must include this amount in your income when your ex-spouse receives it.


Prepaid Income 

Prepared income, such as remuneration for future services, is generally included in income in the year in which it is received. However, if you use an accrual method of accounting, you can carry forward anticipated revenue received for services that will be performed before the end of the next fiscal year. In this case, include the payment in your income as you receive it for services.


Employee's salary

In general, you should include anything you receive in payment for personal services in your gross income. In addition to salaries, wages, commissions, bonuses, and tips, this includes other forms of compensation, such as benefits and stock options.

You should receive a W-2 form, pay tax returns from your employer, showing the payment you received for your services.


Childcare providers

Suppose you provide child care, whether at your home, the child's home, or another place of work, the payment you receive should be included in your income. If you are not employed, you are probably self-employed and have to include payment for the services on Schedule C (Form 1040 or 1040-SR), Business Profit or Loss. You are usually not an employee unless you are under the will and control of the person who employs you over what to do and how to do it.


Fringe Benefits

Any fringe benefits you receive in connection with the provision of your services are included in your income as compensation unless you pay fair market value for them or are specifically excluded by law. Refraining from providing services (for example, under a non-compete agreement) is considered the provision of services within the meaning of this rule.


Beneficiary of the fringe benefit 

You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is offered. Even if given to someone else, you are considered a recipient as a member of your family.

An example is a car that your employer gives to your spouse for your services. The car is considered to be delivered to you and not to your spouse.

You don't have to be an employee of the supplier to receive a fringe benefit. If you are a member, director, or self-employed person, you can also be the recipient of a fringe benefit.


Business and investment income

Rental of personal property

If you rent personal property, such as equipment or vehicles, how you report your income and expenses is usually determined by:

  • Whether or not the rental activity is a business, or

  • If the rental activity is carried out for profit.

In general, if your primary goal is to earn income or profits, and you are engaged in the rental business on an ongoing and regular basis, your rental business is a business.

 

Partnership Income

A partnership is generally not a taxable entity. The income, profits, losses, deductions, and credits of a partnership are transferred to the partners on the basis of the distributive participation of each shareholder in these elements. 

  • Partner's Distributive Share: Your distributive share of the partnership's income, gains, losses, deductions, or credits is generally based on the partnership agreement. You must declare your distribution portion of these items upon return, whether or not they were distributed to you. However, the portion of the related losses is limited to the adjusted basis of membership in the company at the end of the year of the company in which the losses occurred.

  • Partnership Return: Although a partnership generally does not pay taxes, you must complete an information return on Form 1065. This shows the results of the partnership's operations for the fiscal year and the items to be transferred to the partners.


S Corps Income

In general, an S corporation does not pay taxes on its income. Instead, the company's income, losses, deductions, and loans are passed on to shareholders on a proportional basis from each shareholder. You must declare your share of these items upon return. In general, the items transferred to you will increase or decrease the basis of your S Corporation stock as appropriate.


  • S Corporation Return: An S corporation must file a return on Form 1120S. This shows the corporation's results of operations for the fiscal year, and entries affect shareholders' individual tax returns.

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Royalties

Royalties from oil, gas, and mining copyright, patents, and property are taxed as ordinary income.

Royalties are generally reported in Part I of Schedule E (Form 1040 or Form 1040-SR), Additional Income and Losses. However, if you are interested in oil, gas, or mining operations or a writer, inventor, artist, etc., self-employed, report your income and expenses on Schedule C.


Virtual Currency

The sale or other exchange of virtual currencies or the use of virtual currencies to pay for goods or services or the possession of virtual currencies as an investment often has tax consequences that may result in tax obligations.

 

Bartering

Bartering is the exchange of goods or services. There is generally no exchange of money. An example of barter is an installer who exchanges plumbing services for the dental services of a dentist. The exchange does not include agreements that only provide for the informal exchange of similar services for non-commercial purposes (for example, a nursery cooperative run by close relatives). You must include in your income, upon receipt, the fair market value of the goods or services you receive in the transaction. 


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Carmen Garcia
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