With National Small Business Week recently passed, it’s a good time to look at how business owners appear on their personal tax returns. The IRS’s Spring 2022 Statistics of Income Bulletin has data on 2020 returns.
Here are some highlights for a tax portrait of business owners:
Business income and losses reported
Of the 164,187,262 federal income tax returns filed for 2020, 27,455,060 attached Schedule C to report non-farm income or loss from a sole proprietorship (farming income is reported on Schedule F discussed later). Schedule C is also used by independent contractors, including those who work in the gig economy. And it’s used by an owner of single-member limited liability company (LLC) that did not elect to be taxed in any other way. This means nearly one in six filers had a Schedule C. There were 426,948 more Schedule C filers in 2020 than in 2019.
Schedule C filers fell into all income categories (based on adjusted gross income):
- $30K to under $50K: 4,030,330
- $50K to under $100K: 5,427,824
- $100K to under $200K: 4,083,880
- $200K to under $250K: 658,842
- $250K or more: 1,453,202
There were 8,884,681 taxpayers reporting income or loss from partnerships (including multi-member LLCs) and S corporations. This number decreased slightly from 2019. These owners also fell into all income categories (again based on adjusted gross income):
- $30K to under $50K: 732,211
- $50K to under $100K: 1,699,705
- $100K to under $200K: 2,255,231
- $200K to under $250K: 554,134
- $250K or more: 2,183,803
There were 1,717,149 taxpayers who filed Schedule F to report farm income. Of these, 463,321 reported net income while 1,254,828 reported net loss.
Some tax deductions are exclusive to business owners. Here are some breakdowns:
- Deduction of one-half of self-employment tax: 20,071,238 individuals
- Self-employed health insurance deduction: 3,586,172 individuals
- Contributions to self-employed retirement plans: 937,228 individuals
Other tax matters
Business owners of pass-through entities claim their share of business tax credits on their personal returns. Business credits, such as the work opportunity credit, small employer health insurance credit, and pension startup credit, are combined and reported as a single the general business credit. The reason: 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. We don’t know which business credits made up the general business credit.
Due to COVID-19, self-employed individuals were able to claim a qualified sick and family leave credit against income taxes (employers took these COVID-19-related sick leave and family leave credits against employment taxes). For 2020, 987,812 such individuals claim the credit.
Owners of pass-through entities that are profitable claim the qualified business income (QBI) deduction. The QBI deduction is taken in addition to the standard deduction or itemized deductions. But very successful owners may be barred from claiming any deduction due to taxable income limitations. For 2020, it was claimed on 22.7 million returns (for an average of $7,092 per return), totaling $160.7 billion.
As mentioned earlier, self-employed individuals claimed a deduction of one half of self-employment tax. A total of 20,071,238 returns reported self-employment tax totaling nearly $66 billion. However, this figure was slightly lower than what was reported in 2019. Do business closures in 2020 caused by COVID-19 account for this?
What kind of picture do these numbers paint about business owners in the U.S.? Business owners represent a significant portion of the number of taxpayers. They have certain special deductions and are subject to certain unique tax rules. It should be remembered that 2020 was the first year of the pandemic. It will be very interesting to compare these numbers to statistics from 2021, the second year of the pandemic, when they become available. Will they paint a different picture?