The business tax definition is simple: a tax on a business's income that will be a flat 21 percent with the new tax laws that go into effect in 2018. This rate is for corporations, with sole proprietorships and pass-through businesses paying more.

Information About Business Tax

The same rule holds true for businesses and corporations as it does for individuals when it comes to taxes; each must pay taxes on income that is earned. Along with tax on income, businesses must also pay tax on the sale of goods and services and personal property.

Businesses are taxed by the federal government and, in most cases, state governments as well. Currently, 44 states have a business or corporate tax based on a company's earnings. The type of taxes a company must pay at the state level depends on the type of business and the rules of that individual state

The rate of the tax is based on the profit level of the company for that year and is applied according to the rules of the state in which the business operates. Currently, six states impose a tax on gross receipts. This is the total value of the goods and services that a business has sold during the tax year.

Qualifications for a Business

If your primary goal is making money, that should qualify as a business. This is true even if your business shows a loss. On the other hand, if the primary purpose is not making money but something else — such as having fun or incurring deductible expenses — the Internal Revenue Service (IRS) may classify the activity as a hobby versus a business.

The business may be conducted full-time or part-time and may be conducted from home if it is regular and continuous. A person may also have more than one business at any time.

To avoid having the IRS consider the business a hobby, it's up to the owner to convince the IRS that the activity the company is pursuing is with the goal to make money.

Since the IRS cannot just take your word for it that you're functioning as a business, they will be look at your records to determine if the business is earning a profit or behaving as if the owner wants to earn a profit. To make this determination, the IRS uses two tests: profit test and a behavior test.

The Profit and the Behavior Test


  • The IRS presumes that if an activity earns a profit in three out of five years consecutively, profit is the motive.
  • Tax returns for each year will be looked at by the IRS and courts to see if the business turned a profit.
  • Your activities could qualify as a business regardless of how much profit is earned. There is no set amount or percentage that must be earned.
  • If carefully planned at the year's end, a business can show a profit for the year. An example is to press for payments due before the year-end. Also, delay paying any expenses or buying equipment until the beginning of the net year.


  • If the activity continues to incur losses and does not pass the profit test, it doesn't mean there is no hope.
  • You must show, through behavior that is consistent to that of a person invested in making money, that your activities qualify as a business.
  • It must be shown that the enterprise is being conducted in a businesslike manner.

There are many ways of showing your activity is a business and not a hobby. These include:

  • Maintain a separate checking account for your business.
  • Keep good accountability of your profits and losses.
  • Set up a business website and get business cards and stationery with your business name on the letterhead.
  • Have a business listing in the Yellow Pages.
  • Obtain a federal identification number from the IRS.
  • Get all necessary permits and licenses prior to starting your business.
  • Have a separate phone for business.
  • Join and participate in professional organizations and associations.
  • Attend seminars to hone your expertise in your field.
  • Getting a startup loan for your business is also recommended to show intent.

It's also important to create a professional business plan that includes details of business forecasts for revenue and expenses. This detailed plan shows your intent to have a profitable business at some point in the future. This one step is an indicator to the IRS of your intent as a business and not as a hobby.

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