With National Small Business Week over, now is a good time to look at how business owners appear on their personal tax returns, suggests tax attorney Barbara Weltman, author of “Small Business Taxes 2022.”
Every year, the Internal Revenue Service tabulates different categories of data from tax returns, and publishes the results in its Statistics of Income Bulletins. The Spring 2022 Bulletin focuses on personal income tax returns, providing a wealth of information on returns filed for the 2020 tax year. Weltman scrutinized the charts and data in the bulletin to work up a portrait of small businesses as they appeared in their tax returns.
Of the more than 164 million returns filed for 2020, 27,455,060 attached Schedule C to report non-farm income or loss from a sole proprietorship. Schedule C is also used by independent contractors, including those who work in the gig economy. And it’s used by an owner of a single-member limited liability company that did not elect to be taxed otherwise.
“This means that nearly one in six filers had a Schedule C,” Weltman said. “And the number is growing — there were 426,948 more Schedule C filers in 2020 than in 2019.”
Schedule C filers are found in categories ranging from $30,000 to over $250,000, based on adjusted gross income; specifically, there are 4,030,330 in the $30,000-$50,000 range; 5,427,824 in the $50,000-$100,000 range; 4,083,880 in the $100,000-$200,000 range; 658,842 earning $200,000-$250,000; and 1,453,202 earning more than $250,000.
There were 8,884,681 taxpayers reporting income or loss from partnerships, including multi-member LLCs and S corporations. This is a slight decrease from 2019, according to Weltman. These owners also fell into all income categories, based on adjusted gross income.
Of these, 732,211 earned $30,000-$50,000; 1,699,705 earned $50,000-$100,000; 2,255,231 earned $100,000-$200,000; 554,134 earned $200,000-$250,000; and 2,183,803 earned $250,000 or more.
And of the 1,717,149 taxpayers that reported farm income or loss on Schedule F, 463,321 reported net income while 1,254,828 reported net loss.
“Business owners of pass-through entities claim their share of business tax credits on their personal returns,” Weltman noted. “Business credits, such as the Work Opportunity Credit, Small Employer Health Insurance Credit, and the Pension Startup Credit are combined and reported as a single item, the general business credit. This is because there is a limitation on the credit amount that may be claimed currently. Amounts in excess of this limitation are carried back one year and forward for up to 20 years. For 2020, 419,651 returns reported the general business credit, but from the statistics, we don’t know which business credits made up the general business credit.”
Weltman noted that some tax deductions are exclusive to business owners. “For example, 20,071,238 individuals claimed a deduction of one-half of self-employment tax totalling nearly $66 billion. However, this is slightly lower than what was reported in 2019.” One possible reason for the downward move is that a number of businesses closed in 2020 as a result of COVID, she conjectured.
What kind of picture emerges from these figures?
“Business owners are a significant portion of the number of taxpayers in the U.S.,” Weltman said. “They have certain special deductions and are subject to certain tax rules. It should be remembered that 2020 was the first year of the pandemic. Are they a one-off or part of the beginning of a trend? It will be interesting to compare these numbers to statistics from 2021, the second year of the pandemic, when they become available.”