Entrepreneurs start out operating their business as a sole proprietor.  Entrepreneurs who use their home for business activity may be entitled to an “office in the home” deduction.  This deduction is for expenses are limited to the business part of the home and must be the principal place of the business; used to conduct business with customers patients, or clients during normal business hours; and used exclusively and regularly to conduct business activity.  For more information on business use of your home, see Pub. 587, Business Use of Your Home and Form 8829, Expenses for Business Use of Your Home.  The following are examples of the meaning, income, and expenses for different types of businesses an entrepreneur may operate.

Farmer

Farming activities includes raising plants and animals which result in the production of tangible personal property.  A farming business means the cultivation of land or raising or harvesting of any agricultural  or horticultural commodity.  A farmer is not required to care for the plant or animal throughout its life, but must do more than merely hold it for resale.

A person is in the business of farming if they cultivate, operates, or manages a farm for profit either as an owner or tenant.  A farm includes livestock, dairy, poultry, fish, fruit, truck farms, plantations, ranches, ranges, and orchards.

Nonfarming activities include processing activities that are not incidental; reselling activities; contract harvesting for others; hunting or catching animals; canning; freezing; slaughtering; or combining multiple food products into a single item.

Expenses are costs paid for chemicals, land/water conservation, feed, seeds, fertilizer, gasoline/fuel, storage, and vet costs paid to operate a farm.

Gig Economy

Is also called the sharing economy or access economy.  This is activity where people earn income for providing on-demand work, services or good often through a digital platform like an app or digital platform.  Activity done through the app or digital platform includes drive a car for booked rides or deliveries; rent out property; run errands or complete tasks; sell goods online; provide creative or professional services; provide temporary, on demand, or freelance work.

The digital platform matches worker’s services or goods with customers via apps or websites.  The platforms include ridesharing services; delivery services; crafts and handmade item market place; on-demand labor and repair services; property and space rentals.  Income from this activity is reported to workers on Form W-2, Wage and Tax Statement, 1099-K, …… 1099-MISC, Miscellaneous.

For more information on treatment of income, expenses, operations, and proper employment status of workers see the following publications:

• Pub. 583, Starting a Business and Keeping Records
• Pub. 535, Business Expenses
• Pub. 527, Residential Rental Property (including Rental of Vacation Homes)

Investment Dealer or Trader

Types of Investment Income include –

• Capital Gain Distributions – are credited to your account by mutual funds and Real Estate Investment Trusts (REITS).
• Dividends (Qualified and Ordinary) – are distribution of money, stock, or other property paid by a corporation or mutual fund, partnership, estate, trust, or an association.  Common types of dividends include ordinary and qualified dividends, capital gain distributions, and non-dividend distributions.
• Exchange of Like-kind investment property
• Interest income – includes interest received or credited to your account that is available for withdrawal from bank accounts, loans you make to others, and other sources.  The amounts can be received from a bank, savings and loan, government, or other financial institution.  Form 1099-INT, Interest Income is used to report interest income received.  Interest income can able be reported on Schedule K-1, Partners’ Share of Income, Deductions, and Credits, and Schedule K-1 (Form 1120S), Shareholders’ Share of Income, Deductions, Credits, etc.  Use Schedule B to report interest income.
• Ordinary Dividends – are not capital gains because they are not paid out of earnings and profits of the company.
• Qualified Dividends – are ordinary dividends that are subject to 0%, 15% or 20% tax rate.
• Original Issue Discount (OID) – is a form of interest that accrues over the term of the debt instrument (such as a bond).
• Real Estate Mortgage Investment Conduits (REMICS) – a REMIC is an entity formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property.  There issue regular and residual interest to investors and are treated as partnerships with the residual interest holders treated as the partners.  A REMIC can have several classes of regular interests which unconditionally entitles the holder to receive a specified principal amount.  For tax purposes, REMICS are treated as debt instruments.  Form 1099-INT, Interest nor 1099-DIV, Dividends and Other Distributions are not issued, but you can contact the REMIC for the amount needed to report on your tax return.
• Sale of Stock(s) – stocks held less than one year pay a higher rate of tax than long-term stock sales.
• Savings bond interest
• Taxable interest – is interest income from money market funds (MMF); certificates of deposit (CD); U.S. Treasury bills, notes and bonds; tax refunds; installment sales; annuity contracts; gifts for opening an account; and prepaid insurance premiums.
• Tax-exempt interest

The following sources can be reviewed for more information on investment business income and expenses:

• Pub. 925, Passive Activity and At-Risk Rules
• Pub. 1212, Guide to OID Instruments
• Pub. 6251, Alternative Minimum Tax for Individuals
• Pub. 8582, Passive Activity Loss Limitation
• 8960, Net Investment Income Tax
• Schedule B, Interest and Ordinary Dividends

Marijuana Industry

Marijuana Dispensaries that operate in compliance with state laws which the federal government considers an illegal activity must report income from the business.  Federal courts have upheld the IRS’ determination that state compliant marijuana dispensaries have taxable income.  These dispensaries must also comply with employment tax obligations which pertain to proper  classification of workers as independent contractors or employees.

Participants in the marijuana industry must report cash receipts greater than $10,000 in a single transaction and/or related transaction.  They must also develop polies and procedures reasonably designed to identify and report cash receipts, obtain and verify certain customer information, and retain copies of forms filed for five year.  Participants who fail to file a return, pay taxes, fail to make estimated tax payments, or pay taxes late are subject to failure to pay and/or failure to pay taxes.  Penalties are assessed on a case-by-case basis.

Internal Revenue Code section 280E does not allow income from marijuana businesses to be reduced by deductions and expenses because such businesses are considered illegal trafficking of controlled substances within the meaning of the federal Controlled Substance Act.  However, marijuana businesses are permitted to use costs of goods sold to compute gross receipts on Schedule C.

Virtual Currency Trader

Virtual Currency (VC)is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  In some spaces, it operates like a fiat currency that is designated as legal tender that circulates and is customarily used and accepted as a medium of exchange in the country of issuance, although it may or may not be accepted in all spaces.  VC that has an equivalent value in real currency or that acts like a substitute for real currency is referred to as a convertible currency.

Bitcoin is a convertible VC that is digitally traded, purchased or exchanged into other fiat currencies and other virtual currencies.  The sale or exchange of VC or using VC to pay for good or services or holding VC as an investment generally has tax consequences.

Cryptocurrency (Crypto) is a type of VC that uses cryptography to secure transactions that are digitally recorded on a distribution ledger such as blockchain.  Crypto transactions recorded on blockchain and refund to as on-chain and ones not recorded on the distributed ledger are referred to as off-chain.  Hard fork access where a crypto goes through a protocol change that results in a permanent division from the legacy distributed ledger.  If your crypto goes through a hard for but you do not receive any new crypto through an airdrop or some other kind of transfer, you do not have taxable income.  Airdrop is a distribution of crypto to multiple people distributed ledger address.  If you receive new crypto through an airdrop, you will have taxable income in the tax year the new crypto is received.

When VC is sold, gain or loss must be recognized .  VC held less than one year results in a short-term capital gain or loss and if held one year or more results in a long-term capital gain or loss.  The holding period begins on the day after the VC was acquired and ends on the day it is sold or exchanged.  Gain/loss is the difference between adjusted basis in the VC and the amount received on sale or exchange.  Basis is the amount spent to acquire the VC, plus fees, commissions, and other acquisition costs.

Receiving VC as payment for or in exchange for services in considered ordinary income.  The fair market value (FMV) of VC received for performing services is measured in U.S. dollars as of the date of receipt and is subject to self-employment tax.  If VC is used to pay for services then you have exchanged a capital asset for the services and this will result in a capital gain or loss.  If you transfer property held as a capital asset in exchange for VC you recognize capital gain or loss; if you transfer property that is not a capital asset in exchange for VC you recognize ordinary gain or loss.

The following sources can be reviewed for more information on virtual currency:

• IRS Notice 2014-21 provides guidance on the tax treatment of VC transactions
• Pub. 544, Sale and Other Dispositions of Assets
• Pub. 551, Basis of Assets
• Pub. 525, Taxable and Non-taxable Income