Just as the IRS taxes individuals' income, such as income from a job, it also taxes the income a business brings in. And, in the same way that an individual can lower her taxable income through credits and deductions, so can a small business.

Before getting into business deductions, let's make sure we all understand what the tax code means by the term "income." With a few exclusions discussed below, the tax law doesn't care whether you get it from your business, from wages paid by someone else's business or from an investment: it is taxable to you as an individual.

Actually, the better question for small business tax understanding is, "What is gross income?" The tax code (IRC  §   61) talks in terms of gross income, so we will, too. It reads: "Except as otherwise provided ? gross income means all income from whatever source derived." You can't get much broader than that, can you?

Goods and services. Income, for tax purposes, 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 your business (or you individually) receives is income, unless it specifically falls within the exclusions discussed below.

Constructive income. Income also means 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 2000 and hold it for deposit until 2001 without being taxed on it in 2000, 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 had 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 reporting the fruits of his labors to the IRS.

Worldwide income. Americans are taxed on their worldwide income; no matter where earned it is still income taxable in the U.S. There is one exception: if you earn it and reside outside the United States for most of the year, some or all of your foreign income may be excludable. See IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

What isn't income: exclusions. Some kinds of income fall into the "except as otherwise provided" exception of IRC  §   61. For instance, the tax code specifically excludes gifts and inheritances from taxable income. There is no dollar limitation on how much you can get by these means without tax to you. (Sorry, the $10 million that is being dropped off by the Prize Patrol from Publisher's Clearinghouse is not legally a gift and is taxable.) Thankfully, many so-called fringe benefits provided by businesses to owners and employees are specifically excluded from income. Most of the statutory exclusions from income granted by Congress are found in IRC  § §   101 to 150.

Return of capital. Of great importance to owners and investors in businesses is that the return of a capital investment is not taxable income. In other words, to the extent that you sell a business or an asset and get back your money exchanged for the asset, you haven't earned any taxable income. Only the profit, if any, is taxed.

Toni invests $1,000 in the stock of Ronaldo's Rubber Fashions, a small business corporation, and later sells her stock for $1,500. Only $500 is considered income for tax purposes; the other $1,000 is a return of capital to Toni.

Tax-free withdrawals. If you borrow against an asset, whether it belongs to your business or to you personally, the loan proceeds are not income. This is a valuable tool for taking money tax-free out of an unincorporated business that holds an appreciated asset, such as real estate.