Intuit Academy Tax Practice Exam

How should taxpayers report Ordinary Business Income on their tax returns?

1. On Schedule C

2. On Line 1 of Schedule K-1

3. On Form 1040, Line 1

4. On Schedule E

The correct answer is: On Form 1040, Line 1

Ordinary Business Income refers to the net income from business operations that is reported by sole proprietors or single-member LLCs on their personal income tax returns. The proper reporting of this income is essential for accurate tax filing. When individuals operate a business, they typically report this income on Schedule C, which specifically addresses profit or loss from a business. The net income calculated on Schedule C is then transferred to Form 1040, which is the main individual income tax form. Specifically, this ordinary business income is included on Line 1 of Form 1040, summarizing all taxable income for the taxpayer. It's important to note that while Schedule K-1 is used for partnerships and S corporations to report income passed through to the partners or shareholders, it is not the correct form for sole proprietors. Similarly, Schedule E is used for reporting supplemental income such as rental income or income from partnerships and S corporations but does not apply to ordinary business income from a sole proprietorship. Understanding the correct forms and schedules for various types of income is crucial for proper compliance and reporting on tax returns, ensuring that taxpayers correctly categorize and convey their income to the IRS.