J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Income for Service Businesses

If your main business activity is providing services to customers and clients, you are in a service business. As such, reporting business income is generally a simple matter. You report as income all of your revenues from performing services according to your method of accounting. Since most service businesses are on the cash basis, income usually is reported when fees are collected.

1099 Income

If you are an independent contractor, your clients or customers who are in business are required to report income paid to you on Form 1099-MISC, Miscellaneous Income. This informs the IRS of income you have received. Income is required to be reported on Form 1099 if annual payments are at least $600, but you are required to report on your tax return all income you receive (even if no Form 1099 has been issued). Form 1099-MISC must also be given by businesses to incorporated attorneys and law firms for payments of $600 or more.

Advances and Prepayments

If you receive income for services to be performed in the future, you usually report the income if you have free and unrestricted use of the money.

However, if you use the accrual method and receive an advance payment for services to be performed by the end of the next year, you can elect to postpone, including the advance payment in income, until the next year. Postponement cannot extend beyond that next year.

Example

You own a dance studio and on November 1, 2012, receive payment for a 1-year contract for ...