There are many different kinds of business income, and almost all of them are taxable.

Just as the IRS taxes individuals' income, such as income from a job, the IRS also taxes the income a business brings in. A small business can lower its taxable income through deductions and credits, just like an individual.

Before learning about business deductions, it's necessary to understand what the tax code means by the term "income" and "gross income."

What Is Income?

The tax code (IRC § 61) reads: "Except as otherwise provided … gross income means all income from whatever source derived." This includes all of the following:

Goods and services. Taxable "income" doesn't mean just cash; it can take many forms. Goods, property or services received have all been held to be within the definition of income.

If you barter (exchange goods or services for the same), the fair market value of the item or service you received should be included in your tax reported income. Of course, a lot of bartering goes on, and the IRS isn't any the wiser, but getting away with it doesn't make it right. Anything of value that you or your business receives is income, unless it specifically falls within the exclusions discussed below.

Constructive income. Income also includes anything you have the right to put your hands on but don't for some reason. The legal doctrine of "constructive receipt" says that as soon as money or property is available to you, or is credited to your account, it becomes income -- whether you grab it or not. For instance, you can't get a check for services in November 2003 and hold it for deposit until 2004 without being taxed on it in 2003, the year received.

Illegal income. Note that IRC § 61 is morally neutral; it doesn't distinguish between illegal and legal income. If you earn a living as a hit man for the mob, you still are earning income as far as the IRS is concerned, and you'd better declare it on your tax return. Al Capone wasn't sent to prison for murder, bootlegging or racketeering. He was convicted of tax evasion for not declaring his income from bootlegging and racketeering.