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Income taxation of Texas sole proprietorships

Posted by Chris Peterson | Feb 21, 2013 | 0 Comments

Income taxation of Texas sole proprietorships

If you are starting a new business as a sole proprietorship, federal income tax requirements may be one of your concerns.  Here is some basic information.   Federal taxation is a highly technical subject.  A qualified Bryan Texas business attorney can advise you on the specifics.

Pass through taxation

As a sole proprietor, you don't need to file a separate tax return for your business.  In IRS parlance, a sole proprietorship is a “disregarded entity,” which means you and your business are one single taxpayer.  The business's income and expenses are reported on a Schedule C on your own tax return.  The business's profits are taxed to you in the year you receive them.

You must pay taxes on the profits of the business even if you leave them in the business's accounts for future use by the business and do not transfer any money from the business to your own accounts for personal use.

Husband and wife owners

A business jointly owned and operated by a husband and wife is actually a partnership. However if both spouses materially participate in the business, they may choose for each to be treated as a sole proprietor by electing to file with the Internal Revenue Service as a “qualified joint venture.”

Business expenses and losses

As a sole proprietor, you can deduct business expenses, such as rent, supplies, and advertising, from your business income.  It's important for you to keep accurate records and receipts to document your expenses.  It's also a good idea to keep separate business and personal bank accounts and to pay for business expenses from your business account and personal expenses from your personal account.  If the IRS challenges you, you want to be sure you can prove those plane tickets and meal receipts were for a business trip and not a vacation.

If your business operates at a loss initially, you may be able to deduct the loss from other income.  But there are some complicated tax rules that may limit the amount you can deduct.  In general, you can deduct business losses only up to the amount you have invested in the business.  Additional limits apply if you don't materially participate in the business.

Call a Bryan, Texas business attorney for the legal needs of your small business

The Bryan, Texas business attorneys at the Peterson Law Group will be happy to meet with you to discuss the legal needs of your new business.  Phone 979-703-7014 to schedule a consultation.

About the Author

Chris Peterson

Chris Peterson is the owner of Peterson Law Group. He practices primarily in the areas of wills, trusts and estate planning; probate and trust administration; elder law; and business law. Chris is also the owner of Brazos 1031 Exchange Company.


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