Office of Tax Analysis 

Technical Paper 4 (Update) 

November 2016 

Methodology to Identify Small Businesses 

Richard Prisinzano, Jason DeBacker, John Kitchen, Matthew Knittel, 

Susan Nelson and James Pearce 

OTA Technical Papers is an occasional series of reports on the research, models and datasets 

developed to inform and improve Treasury’s tax policy analysis. The papers are works in 

progress and subject to revision. Views and opinions expressed are those of the authors and do 

not necessarily represent official Treasury positions or policy. OTA Technical Papers are 

distributed in order to document OTA analytic methods and data and invite discussion and 

suggestions for revision and improvement. Comments are welcome and should be directed to the 

authors. OTA Papers may be quoted without additional permission. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
 

 

 

 

 

 

 

 

METHODOLOGY TO IDENTIFY SMALL BUSINESSES1 

November 2016 

Richard Prisinzano2, Jason DeBacker3, John Kitchen4, Matthew Knittel5, Susan Nelson6 and 

James Pearce7 

Due to data constraints and the lack of clear definitions, prior analyses of the tax 

code’s impact on small business owners were flawed. In this paper, we develop a 

methodology to define and identify small businesses. We apply this to entities in 

tax year 2007 and 2010. 

1 The authors are grateful to Nick Bull, Geraldine Gerardi, Scott Jaquette, Jay Mackie, John McClelland, Janet 

McCubbin, and participants in the Tax Economists Forum for their helpful comments in developing the 

methodology, and to Portia DeFilippes and Michael Cooper for programming support. Additional comments can be 

sent to richard.prisinzano@treasury.gov. 2 Richard Prisinzano: Office of Tax Analysis, U.S. Department of the Treasury, Richard.Prisinzano@treasury.gov. 3 Jason DeBacker: University of South Carolina, Dason.DeBacker@moore.sc.edu. 

4 John Kitchen: Office of Tax Analysis, U.S. Department of the Treasury, John.Kitchen@treasury.gov. 5 Matthew Knittel: Independent Fiscal Office, Commonwealth of Pennsylvania, MKnittel@ifo.state.pa.us. . 6 Susan Nelson: Office of Tax Analysis, U.S. Department of the Treasury, Susan.Nelson@treasury.gov. 

7 James Pearce: Office of Tax Analysis, U.S. Department of the Treasury, James.Pearce@treasury.gov. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
 

2 

EXECUTIVE SUMMARY 

Although “small business owners” are often the subject of tax policy debate, a consensus does 

not exist regarding the specific attributes that distinguish small businesses from other firms. 

Previously, the Office of Tax Analysis had counted a small business owner as any individual 

who receives flow-through income from a sole proprietorship, partnership, S corporation, 

farming operation or miscellaneous rental activity. This overly broad definition was used 

because, for the majority of flow-through business income (partnerships and S corporations), it 

was not possible to trace income from the business entity to the respective owner(s). Due to 

newly accessible tax data, this technical constraint has been overcome. In this paper, we present 

a methodology that utilizes these new tax data, thereby allowing a more nuanced definition of 

small business owner. 

Our revised methodology begins with the characteristics that define a “business.” We look at the 

six tax forms and schedules filed by individuals or firms that could potentially represent business 

activity: Form 1040 Schedules C, E and F, Forms 1065, 1120 and 1120S. We develop two tests 

based on income and deductions reported on those forms and schedules to separate filers into 

business and non-business groups. We then further sub-divide our business group into small and 

other businesses. Drawing from various tax code provisions that provide preferential treatment 

to certain filers, we set the small business threshold at $10 million of income or deductions. 

Using these criteria, we find that 53 percent of taxpayers who file one of the six forms or 

schedules we consider qualify as both a business and a small business for tax year 2010. Those 

small businesses reported approximately 18 percent of total and 16 percent of net business 

income. We also find that 20 percent of small businesses conform to our definition of an 

employer. 8 

We note that our revised methodology is but one reasonable approach that could be used to 

identify small businesses and their owners. However, we believe it represents a significant 

improvement over previous methodologies that were constrained by data limitations. 

8 For 2007, we found 55%, 19% and 16%, respectively. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

2 
 

 

 

 

 

3 

I. Introduction 

Policymakers often inquire about the tax code’s impact on “small business” and “small business 

owners.” Although many factors motivate their concerns, two factors seem especially relevant. 

First, it is widely believed that many small businesses operate at a competitive disadvantage 

relative to their larger counterparts. For example, small firms might have greater difficulty 

raising the capital necessary for investment and expansion. They might also realize thinner 

profit margins if their sales volume is insufficient to exploit economies of scale. Second, despite 

any inherent disadvantages, small businesses are perceived to generate a disproportionate share 

of overall economic and employment growth. For these reasons, policymakers are concerned 

that the tax code not excessively burden small businesses or their owners. 

Currently, a consensus does not exist regarding the specific attributes that distinguish small 

businesses from other firms. Previous analyses by the Office of Tax Analysis (OTA) and others 

(e.g., Joint Committee on Taxation, Tax Policy Center) counted a small business owner as any 

individual who reports flow-through income from a sole proprietorship, partnership, S 

corporation, farming operation or miscellaneous rental activities. Although this approach is 

easily implemented and understood, it is at once too broad and too narrow. The approach is too 

broad because it includes owners of large firms as well as individuals whose business income is 

negligible or who might not be engaged in canonical business activities. The approach is too 

narrow because it excludes owners of small C corporations. Due to these shortcomings, previous 

analyses of how tax law changes impact “small businesses” or “small business owners” have not 

been as informative as they might have been – the analysis might not address the true underlying 

concerns of policymakers. For example, should we count all misclassified employees and 

independent contractors who file a Schedule C (sole proprietorship) as small business owners? 

Should we count partners of large hedge funds as small business owners? Although issues such 

as these have been noted in the past, to date there has been no effort to address them in a 

satisfactory manner. 

In our previous technical paper, we described a methodology to define a business, a small 

business, and a small business owner using tax return data. The methodology begins with the six 

tax forms and schedules filed by individuals or firms that could potentially represent business 

activity. We separate those returns into business and non-business groups, and then further subdivide the business group into small and other businesses. The final part of our methodology 

uses newly accessible tax data to link income reported by small businesses to the individual 

income tax return of their respective owners. In this manner, we identify relevant characteristics 

of small business owners such as adjusted gross income (AGI) and marginal tax rates. 

Up to this point our work has had a narrow focus. It does not discuss the myriad tax-related 

issues that affect small businesses and their owners.9 10 It also does not compare the definitions 

9 For a discussion of these issues, see, for example, Gary Guenther, CRS Report, February 26, 2010, “Distribution 

of Small Business Ownership and Income by Individual Rates and Selected Policy Issues”; Jane Gravelle, CRS 

Report, September 3, 2010, “Small Business and the Expiration of the 2001 Tax Rate Reductions: Economic 

Issues”; Alan Viard & Kevin Hassett, “The Small Business Tax Hike and the 97% Fallacy,” Wall Street Journal, 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

4 

used in this paper to those used by other governmental agencies, such as the Small Business 

Administration (SBA). In general, the small business definition used by Treasury and the SBA 

will differ because they are based on different data sources and concepts and are used for 

different purposes. The definitions used by SBA to identify firms that are eligible to receive 

certain government grants and assistance and is generally considered to be a relatively broad 

measure.11 By contrast, the small business definition we employ draws on tax code provisions 

that provide favorable treatment to firms that fall under various size thresholds. 

While in our work we identify certain taxpayers as small business owners, we do not assert that 

those individuals are necessarily engaged in entrepreneurial activity. The Meriam-Webster 

dictionary defines an entrepreneur as a person who organizes, manages and assumes the risk of a 

business or enterprise. The individuals we identify as small business owners may or may not 

actively participate in an enterprise, and may incur little or no risk. We also note that our 

methodology likely excludes some individuals who might be viewed as entrepreneurs because 

their business tax return does not conform to our definition of a small business. 

Finally, we note that our methodology is but one approach that could be used to identify small 

businesses and their owners. Although many different approaches could be used for this 

purpose, the issues we discuss would remain pertinent and must be addressed (either implicitly 

or explicitly) regardless of the methodology employed. Hence, our work serves a dual purpose: 

(1) to correct known shortcomings of previous methodologies and (2) to discuss issues that 

policymakers should clarify to ensure that analysts use appropriate data to evaluate current and 

proposed tax policy. 

This technical paper is an update of our previous work. It uses 2010 tax data rather 2007. It 

proceeds as follows. Section II discusses the criteria we use to distinguish business from nonbusiness entities. In Section III, we further sub-divide businesses into small and other entities 

and provide tabulations for small businesses based on total income, net income, industry, and 

employer status. Section IV concludes our analysis with a review and summary of our findings. 

II. Business versus Non-Business Filers 

Our analysis begins with all entities that file one or more of the following business tax returns: 

Form 1040 Schedules C, E-Part I, and F (sole proprietor, miscellaneous rental real estate income, 

and farmers), Form 1065 (partnership), Form 1120 (C corporation), and Form 1120S (S 

corporation).12 Although we refer to these forms and schedules as “business” returns, closer 

September 3, 2010; Haltwinger, Jarmin & Miranda, “Who Creates Jobs? Small vs. Large vs. Young,” NBER 

Working Paper No. 16300, August 2010. 

10 Currently, John McClelland and Richard Prisinzano are working on a paper that addresses these issues. 11 To identify small firms eligible for its programs, the SBA uses industry-specific size standards that are based on 

sales or number of employees. If based on sales, the threshold ranges from just under $1 million to $35.5 million, 

but most industries employ the $7 million benchmark level. If based on number of employees (capital intensive 

industries), employment levels range from 50 to 1,500 employees, but most industries employ the 500 employee 

benchmark level. For research purposes, the SBA generally uses firms with fewer than 500 employees. See 

http://www.sba.gov/advo/research.. 12 If an individual reports income that is attributable to multiple types of business entities, then we do not combine 

the activity to form a single business entity. For example, it is not uncommon for taxpayers to report income from 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

4 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5 

inspection reveals that many filers are not engaged in business activity as it is traditionally 

understood. Some examples of non-business activity include the following: 

• Many Schedule C filers work for one or more firms and receive 1099-MISC forms that 

report their “non-employee compensation” instead of W-2s that report wages. These 

individuals report this compensation as gross receipts (per the instructions) and often 

report no deductions, or very minimal deductions that reflect elements of personal and 

business use, such as transportation, travel or meal expenses. Some of these filers are 

technically misclassified employees; others are correctly treated as independent 

contractors.13 In many instances, these individuals are not substantially different than 

employees of the firm to whom they provide labor services. 

• Individuals or entities might form partnerships to re-distribute earnings that are passed 

through from other partnerships. These entities are conduits that merely redistribute 

funds. Other partnerships might solely hold financial assets and receive interest, 

dividends or capital gains but conduct no business activity. These partnerships could be 

considered “passive investment vehicles.” 

• Certain C corporations could also be viewed as investment vehicles if they merely hold 

investments and conduct little or no business activity. Individuals could benefit from the 

graduated corporate rate structure (such as 15 or 25 percent) and minimize tax liability by 

remitting tax at the lower corporate rate and then retaining earnings in the corporation.14 

• Certain individuals who file Form 1040 Schedule E, Part 1 might report minimal income 

due to the incidental rental of a vacation home. 

• Individuals might attempt to claim a tax loss for activity that is properly characterized as 

a hobby, not a business. 

The first step in our methodology is the development of criteria to separate business from nonbusiness entities. To do this, we look to the tax code. Despite the stylized examples above, the 

distinction between business and non-business activity is not always clear, and the Internal 

Revenue Code (IRC) fails to provide explicit guidance because it does not define the term “trade 

or business.” In general, the IRC characterizes most activities carried on for a livelihood or for 

profit as a trade or business. If a taxpayer is engaged in a trade or business, then the taxpayer 

may deduct from gross income all “ordinary and necessary” expenses of carrying on the trade or 

business that are paid or incurred during the tax year.15 If there is uncertainty about whether an 

activity qualifies as a trade or business, then tax authorities will apply certain tests and consider 

an S corporation and a sole proprietorship. However, we do combine multiple filings of Schedule C or Schedule F 

by an individual to form a single entity of each type. In general, the combination of activity reported on multiple 

Schedule C filings increases the likelihood that an individual will be classified as a small business owner. 

13 For discussion of legal distinctions between misclassified employees and independent contractors, see, for 

example, the Administration’s FY12 Budget proposal, “Increase Certainty with Respect to Worker Classification.” 

“Worker classification generally is based on a common-law test for determining whether an employment 

relationship exists. The main determinant is whether the service recipient (employer) has the right to control not 

only the result of the worker’s services but also the means by which the worker accomplishes that result.” 

Department of the Treasury, February 2011, “General Explanations of the Administration’s Fiscal Year 2012 

Revenue Proposals,” p. 107. See http://www.treasury.gov/resource-center/taxpolicy/Documents/Final%20Greenbook%20Feb%202012.pdf . 14 Some such corporations might be subject to the personal holding company tax. 15 An expense is “necessary” if it is appropriate and helpful to the taxpayer’s business. An expense is “ordinary” if 

it is one that is common and accepted in the particular business activity. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

5 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

6 

the relevant facts and circumstances of individual taxpayers. This approach is referred to as the 

“hobby loss rules.” If an activity is deemed a hobby, and not a trade or business, then expense 

deductions are limited to the income produced by the activity so that hobby losses cannot offset 

other income. By contrast, there are no restrictions on active trade or business losses; they may 

be used to offset all other types of income, regardless of its source.16 

In order to distinguish hobby from business (i.e, for-profit) activities, tax authorities rely first on 

the historical profits test from IRC Section 183(d). This test states that, in general, an activity is 

presumed to be engaged in for profit if gross income from the activity exceeds the deductions 

attributable to such activity in any three of five consecutive tax years, including the current tax 

year. If an activity fails the historical profits test or the test is not applicable, then Section 1.183-

2 of the Income Tax Regulations lists nine specific factors that may be used to distinguish 

business from hobby activity. They are as follows: 

• The manner in which the taxpayer carries on the activity. 

o Was it a businesslike manner? Did the taxpayer keep accurate books and records? 

• The expertise of the taxpayer. 

o Did the taxpayer prepare for the activity through the study of accepted business, 

economic, and scientific practices? Did the taxpayer consult with experts? 

• The time and effort expended by the taxpayer in carrying on the activity. Was it 

“substantial”? 

• An expectation that assets used in the activity may appreciate in value. 

• The success of the taxpayer in carrying on other similar or dissimilar activities. 

• The taxpayer’s history of income or losses with respect to the activity. 

• The amount of occasional profits, if any, which are earned. 

o The amount of profits in relation to the amount of losses incurred, and in relation 

to the amount of the taxpayer’s investment and the value of the assets used in the 

activity, may provide useful criteria in determining the taxpayer’s intent. 

• The financial status of the taxpayer. Does the taxpayer have other sources of income? 

• Elements of personal pleasure or recreation. 

We condense these nine factors into two general principles that we use to determine whether 

activity reported on business tax returns reflects “substantial” operations that are carried out in a 

“businesslike” manner. They are as follows: 

• De Minimis Activity. Does the activity generate, or have the potential to generate, 

income that is non-negligible to the business owner(s)? Under this principle, very 

small entities would not qualify as a business, even though they may report income 

and deductions on the business return. For example, an individual who reports small 

amounts of rental income and expense on Schedule E from a two-month rental of a 

vacation home might not qualify as a business. 

• Businesslike Activity. If the income is non-negligible, do the owners undertake 

actions that demonstrate “businesslike” activity? If they do, then they should report 

expenses related to employees, inventories, investment, office supplies, utilities, 

16 Because of the passive activity loss rules, some taxpayers may not be able to deduct certain losses from trade or 

business activities in which they do not “materially participate.” 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

6 
 

 

 

 

 

 

 

 

 

7 

insurance or rent. Under this principle, Form 1040 Schedule C filers who report only 

their own labor compensation as gross receipts (e.g., certain service providers), but 

little or no expenses, would not qualify as business entities because most of those 

filers are not substantially different than employees of the firm who earn and report 

wage income. Entities that merely redistribute income or function as investment 

vehicles would also not qualify as business entities. 

We convert these principles into two tests that we apply to all potential business returns. If an 

entity passes both tests, then we deem the entity a business. The two tests are as follows: 

De Minimis Test: Total income or total deductions exceed $10,000, or their sum exceeds 

$15,000. 

Receiving income and incurring expenses can signal business activity. We apply our first test to 

income and deductions (or their sum) reported on the tax return to allow symmetric treatment of 

business activity. We eliminate entities that fail this test because the reported activity, regardless 

of its form or nature, does not generate substantial income to the owner(s) and it is unlikely that 

the activity required significant time and effort on the part of the owner(s). This test also 

eliminates many filers who are likely engaged in hobby activities. 

We define total income as the sum of all income reported on the business return including gross 

receipts, rents, dividends, capital gains, royalties, and interest.17 18 We use the absolute value in 

cases where an income source can be negative (e.g., a loss from the sale of business assets). We 

use the absolute value so that negative income does not offset other types of income and because 

negative amounts also represent business activity. The definition of total deductions is discussed 

below. 

Business Activity Test: Total deductions exceed $5,000. 

Our second test eliminates entities that only report income, with minimal or no deductions, such 

as pure labor providers or investment vehicles. The deduction floor we impose ensures that 

entities deemed a business operate in a "businesslike" manner through minimal outlays for 

investment (depreciation expenses), the carrying of inventories (cost of goods sold), employment 

of individuals, rents for buildings or equipment, or payments to other firms for goods or services. 

More broadly, the deduction floor generally requires that business income reflect more than a 

pure return to labor services provided by the owner(s). This requirement seems to reflect the 

intention of policymakers. When tax code provisions provide preferential treatment to small 

businesses, the provisions usually target expenses such as equipment investment (e.g., Section 

179 expensing), cost of goods sold (e.g., exceptions to inventory accounting), and start-up costs. 

17 For partnerships and S corporations, we include any gross rents reported on Form 8825, which partnerships and S 

corporations engaged primarily in rental real estate activity must file. Firms report gross rents plus any associated 

deductions on that form. Any net income is then carried over to the Schedule K submitted with Form 1065 

(partnership) or 1120S (S corporation). We also include all other income and deduction items reported by those 

entities on Schedule K. 

18 For the income test, we exclude any miscellaneous "other income" reported on the front page of business returns 

because that field may include amounts that are not properly viewed as income, such as refunds of federal and state 

fuel taxes (farmers and sole proprietors) or income passed through from partnerships that we already count 

(corporations). 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

7 
 

 

 

 

 

 

 

 

 

 

 

8 

Preferential treatment is not targeted towards individuals who provide only labor services and as 

such, these individuals generally do not benefit from targeted “small business” provisions. 

For the purposes of our tests, we define total deductions as the sum of wages-salaries, interest 

paid, payments for goods and services purchased from other firms, rents, repairs, taxes, 

advertising, bad debts, depletion, depreciation, and other miscellaneous deductions reported by 

the entity. For corporations, we do not include payments for “compensation of officers” (line 12, 

Form 1120 or 1120S) because it is likely that those deductions represent the “reasonable 

compensation” that owners are required to pay themselves for labor services provided to the 

firm.19 20 By excluding these deductions, we place corporations on equal footing with 

partnerships and sole proprietors. (General partners and sole proprietors do not report payments 

to themselves for services provided to the firm as a wage expense. All returns to labor and 

capital are included in residual profits and are subject to self-employment taxes.) For an entity to 

be considered a business, we must observe deductions other than wage payments to corporate 

owners. 

We make one further adjustment to this test in cases where the sum of gross receipts and rents 

comprise less than ten percent of total income. In these cases, the entity essentially reports 

investment income only. To ensure these entities are not merely passive investment vehicles, we 

exclude interest expense from total deductions. Our tests deem an entity that reports $50,000 of 

interest income and $20,000 of interest expense as a "non-business." For entities that primarily 

report investment income, we must observe other deductions besides interest expense to deem 

the entity a business. 

Note on Self-Employed Individuals 

Due to the thresholds we apply for our business tests, we include some and exclude other selfemployed individuals from our business group. While it seems clear that individuals who report 

only income and no deductions might not be engaged in business activity as typically conceived 

(e.g., misclassified employees, certain independent contractors), it is less clear at what point 

those same individuals engage in sufficient “businesslike” activity as evidenced by deductions 

and become business entities. For the purposes of this work, we have set that threshold at 

$5,000. 

We apply the same business tests to self-employed individuals as applied to other businesses that 

employ individuals and have a separate business identity. Under our tests, an individual who 

earns a livelihood as a painter and reports $40,000 of income and $6,000 of supplies would 

qualify as a business entity and small business owner. An individual who sub-contracts as a 

consultant and reports $80,000 of income and $9,000 of related expenses would also qualify as a 

business entity. However, in either case, if reported deductions fell below $5,000, then our tests 

would not deem the self-employed individual a business entity. 

19 If a corporation reports only payments for compensation of officers and no wages paid to employees, then we also 

disregard any deductions for employee benefit plans (generally health) and pension-profit sharing plans since those 

benefits likely accrue to the owner(s). 

20 For partnerships, we exclude guaranteed payments to partners (line 10, Form 1065) for similar reasons. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

8 
 

 

 

 

 

 

 

 

 

 

9 

Results: Business vs. Non-Business Entities by Return Type 

The data used for this analysis are from the IRS Statistics of Income (SOI) individual and 

business tax files for tax year 2010. All tax files are stratified random samples weighted to 

represent national totals. For Schedules C, E, and F, the file contains roughly 309,000 individual 

income tax returns. Data for partnerships are from a sample of roughly 44,000 tax returns, while 

the S corporation sample includes 33,000 returns and the C corporation sample includes 58,000 

returns.21 Table 1 presents data for all filers across the six business returns we examine, and 

results from the application of our two business tests. Results are as follows: 

Form 1040, Schedule C: Sole Proprietors 

Individuals who file Schedule C may be engaged in a wide range of activities. While some filers 

operate businesses that provide their sole means of support, other filers report incidental activity 

in which they are engaged on a part-time or seasonal basis. Many filers do not operate a 

business, but rather supply labor or services to a firm in exchange for remuneration on an hourly 

or per-job basis. For this final group, the deductions they report may not represent outlays that 

need to be recouped via future sales of goods and services, but rather are expenses that will be 

quickly reimbursed by the firm that employs the individual. For example, a firm might pay a 

service provider a higher hourly wage than a comparable employee as reimbursement for travel 

expenses. Alternatively, a firm might directly reimburse a service provider if an itemized bill is 

presented for the same expenses. Regardless of the reimbursement method, the individual would 

report all remuneration as gross receipts on Schedule C, as well as any deductions associated 

with the provision of labor services. Common deductions for these filers are transportation and 

travel-meal expenses. 

In the situation just described, the individual may not be substantially different than an employee 

of the firm from which he or she receives compensation. Yet, at some point, these same 

individuals could also be considered a small business entity to the extent they do more than 

merely supply labor services. For example, the individual might also incur expenses related to 

inventories, advertising, office supplies, and the payment of utilities or rent. Those types of 

deductions provide a strong signal that the individual engages in businesslike activities such as 

itemizing and tracking expenses, the development of a business plan or the maintenance of a 

separate business address. 

Because many Schedule C filers could be viewed as quasi-employees of the firms to whom they 

provide labor or services, we discount, but do not disregard, certain deductions that are claimed 

intensively by those individuals: car-truck expenses (line 9, includes the standard mileage 

deduction) and travel, meals and entertainment (line 24).22 We discount those deductions by 50 

percent because (1) they are claimed intensively by misclassified employees and independent 

21 For detailed discussion of the data and sample characteristics for individual tax returns, see Statistics of Income: 

Individual Income Tax Returns 2007, Publication 1304 (Rev. 07-2009), Internal Revenue Service, Department of the 

Treasury. Because of the sample construction, varying degrees of representation and potential error (relative to the 

population) are present across sample strata. For example, for Schedule C filers the sample fully represents the 

population for the highest income strata (for “$5 million under $10 million” and “$10 million or more”); at the lower 

income levels of under $30,000, a sample of 12,426 represents nearly 10 million returns of the population. 22 For detailed instructions regarding the amounts that filers may claim for these expenses, see IRS Publication 463: 

Travel, Entertainment, Gift and Car Expenses. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

9 
 

 

 

 

 

 

 

 

 

 

 

10 

contractors, (2) they are potentially a weaker signal of business activity and (3) it is likely that 

many of those deductions contain both personal and business elements. Therefore, if a Schedule 

C filer reports $3,000 of advertising expenses and $8,000 of car-truck expenses, then we set total 

deductions equal to $7,000.23 

For tax year 2007, 23.2 million individuals filed a Schedule C, and 10.7 million (46 percent of 

total) qualify as a business based on our tests (see Table 1). Although we deem less than onehalf of filers a business, those entities reported the vast majority of total income (94 percent, 

average income of $120,848) and net income (80 percent, average profit of $20,891). The 

proportion of filers that were profitable in our business group (77 percent) is roughly the same as 

proportion that is profitable for all Schedule C filers (75 percent). 

For tax year 2010, 23.0 million individuals filed a Schedule C, and 9.9 million (43 percent of 

total) qualify as a business based on our tests (see Table 1). As in 2007, we deem less than onehalf of filers a business but those entities reported the vast majority of total income (92 percent, 

average income of $110,871) and net income (75 percent, average profit of $20,186). The 

proportion of business filers that were profitable is the same proportion for all Schedule C filers 

(76 percent). 

Form 1040, Schedule E: Supplemental Income and Loss (Part 1), Rental Income 

Taxpayers report rental real estate activity on Part 1 of Form 1040, Schedule E.24 Unless the 

owner provides “substantial” services to the tenants or qualifies as a real estate professional, the 

IRS generally considers activity reported in Part 1 of Schedule E as a passive activity for the 

purposes of the passive activity loss rules. Therefore, taxpayers might face limitations on their 

use of losses attributable to such activity. Despite this treatment, we deem rental activity a 

business if it passes our tests because, much like a traditional business, the owners provide 

services (housing) to consumers (tenants). In that capacity, owners incur and report various 

business expenses, such as advertising, insurance, interest, repairs, and cleaning and 

maintenance. 

However, in many cases, rental activity may not denote the conduct of an active trade or 

business. The rental activity may be incidental to personal use, or may not differ substantially 

from an investment in a financial asset, such as when an owner reports no expenses besides those 

associated with holding title to the property (i.e., mortgage interest, property taxes, and 

depreciation). Similar to our treatment of partnerships and corporations that invest in financial 

assets, we require that Schedule E rental filers evidence at least minimal active management of 

the property beyond deductions for mortgage interest, property taxes and depreciation. To ensure 

that individuals reporting rental income engage in minimal businesslike activity, we exclude 

depreciation and mortgage interest expenses from computed deductions.

25 We require that 

owners report other types of expenses such as cleaning, advertising, maintenance or repairs that 

suggest active management of the properties. 

23 This additional restriction eliminates approximately 700,000 Schedule C filers from our business group. Those 

filers reported average Schedule C total income of $15,800 and average net income of $7,900. 

24 Royalty payments are also reported on Schedule E, Part 1. We do not include royalty income in our analysis 

because the income could represent compensation attributable to activity many years removed. 25 The data do not itemize property taxes separately. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

10 
 

 

 

 

 

 

 

 

,,-.. ~ 

) 

. . ._ ... 

11 

For tax year 2007, 9.6 million individuals reported rental income on Part 1 of Schedule E, and 

reported total income of $253 billion (average income of $26,256) and net income of -$17 billion 

(average loss of -$1,764). The 4.6 million (48 percent of total) filers we deem a business 

reported total income of $212 billion (average income of $46,162) and net income of -$22 billion 

(average loss of -$4,790). The proportion of business filers that were profitable is slightly lower 

(35 percent) than the equivalent proportion all filers (43 percent). 

For tax year 2010, 10.1 million individuals reported rental income on Part 1 of Schedule E, and 

reported total income of $274 billion (average income of $27,123) and net income of -$4 billion 

(average loss of -$396). The 4.9 million (49 percent of total) filers we deem a business reported 

total income of $228 billion (average income of $46,114) and net income of -$11 billion 

(average loss of -$2,225). The proportion of business filers that were profitable is slightly lower 

(37 percent) than the equivalent proportion of all filers (43 percent). 

Form 1040, Schedule F: Profit or Loss from Farming 

When applying our business tests to farm income, we include income and expenses reported on 

Form 1040, Schedule F and Form 4835, Farm Rental Income and Expenses. Individuals use 

Form 4835 to report farm rental income based on crops or livestock produced by a tenant if they 

were the landowner (or sub-lessor) and did not materially participate in the operation or 

management of the farm. For the purpose of our business tests, we include any income from 

cooperative distributions, commodity credit corporation loans, and crop insurance proceeds in 

our definition of total income. 

For tax year 2007, 2.5 million individuals filed a Schedule F, a Form 4835, or both. Those filers 

reported total income of $133 billion (average income of $52,982, predominately sales of 

livestock or agricultural products) and -$11 billion of net income (average loss of -$4,382). The 

1.5 million filers (58 percent of total) we deem a business reported total income of $131 billion 

(average income of $89,221) and net income of -$10 billion (average loss of -$6,811). The 

proportion of business filers that were profitable is slightly lower (37 percent) than the equivalent 

proportion all filers (39 percent). 

For tax year 2010, 2.4 million individuals filed a Schedule F, a Form 4835, or both. Those filers 

reported total income of $154 billion (average income of $63,015, predominately sales of 

livestock or agricultural products) and -$7 billion of net income (average loss of -$2,684). The 

1.4 million filers (59 percent of total) we deem a business reported total income of $152 billion 

(average income of $104,711) and net income of -$7 billion (average loss of -$4,822). The 

proportion of business filers that were profitable is slightly lower (40 percent) than the equivalent 

proportion all filers (42 percent). 

Form 1065: Partnerships 

For partnerships, we make two modifications to our business tests. We exclude any ordinary 

income received from another partnership, estate or trust (line 4, Form 1065) to eliminate double 

counting of income. As noted in the previous section, we also exclude any guaranteed payments 

to partners from our analysis. Both the deductions (line 10) and income amounts (Schedule K, 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

11 
 

 

 

 

 

12 

line 4) reflect a return to partners for services provided and so are similar to distributions that 

partners receive. 

For partnership and S corporation tests and tabulations, we include all investment income and 

deductions reported separately on the Schedule K (except for guaranteed payments to partners).26 

We also include gross rents and any deductions reported on Form 8825 (Rental Real Estate 

Income and Expenses of a Partnership or S Corporation). Partnerships and S corporations report 

rental income and associated deductions on Form 8825. The resultant net income is then 

transferred to Schedule K. 

For tax year 2007, 3.1 million partnerships filed Form 1065. Those partnerships reported gross 

receipts of $3.9 trillion, gross rents of $424 billion (Form 8825), investment income of $1.8 

trillion (Schedule K), and net income of $1.5 trillion (includes ordinary and investment income, 

average profit of $487,996). The 2.3 million partnerships (74 percent of total) we deem a 

business reported gross receipts of $3.9 trillion, gross rents of $417 billion, investment income of 

$1.7 trillion and net income of $1.4 trillion (average profit of $622,948). The proportion of 

business filers that were profitable is slightly higher (61 percent) than the equivalent proportion 

all filers (57 percent). 

For tax year 2010, 3.2 million partnerships filed Form 1065. Those partnerships reported gross 

receipts of $4.0 trillion, gross rents of $470 billion (Form 8825), investment income of $1.2 

trillion (Schedule K), and net income of $.98 trillion (includes ordinary and investment income, 

average profit of $300,448). The 2.5 million partnerships (76 percent of total) we deem a 

business reported gross receipts of $4.0 trillion, gross rents of $463 billion, investment income of 

$1.1 trillion and net income of $.93 trillion (average profit of $377,211). The proportion of 

business filers that were profitable is slightly higher (56 percent) than the equivalent proportion 

all filers (52 percent). 

Form 1120S: S Corporations 

For tax year 2007, 4.0 million S corporations filed Form 1120S. Those corporations reported 

gross receipts of $6.0 trillion, gross rents of $38 billion (Form 8825), investment income of $305 

billion (Schedule K), and net income of $412 billion (includes ordinary and investment income, 

average profit of $103,261). The 3.6 million corporations (89 percent of total) we deem a 

business reported gross receipts of $6.0 trillion, gross rents of $38 billion, investment income of 

$298 billion and net income of $407 billion (average profit of $114,572). The proportion of 

business filers that were profitable is slightly higher (67 percent) than the equivalent proportion 

all filers (64 percent). 

For tax year 2010, 4.0 million S corporations filed Form 1120S. Those corporations reported 

gross receipts of $5.6 trillion, gross rents of $40 billion (Form 8825), investment income of $237 

26 Partnerships and S corporations report investment (i.e., capital gains, dividends, and interest), royalty and rental 

income on Schedule K and not on the front page of the main form (Form 1065 or Form 1120S). Those amounts are 

reported separately because the apportionment rules for the owners may differ compared to the apportionment of 

ordinary business income. Income reported on the Schedule K retains its character when passed through to the 

partner or shareholder, and so might face different tax rates or limitations than distributions of ordinary business 

income. Deductions reported on the Schedule K include investment interest expense, the Section 179 expensing 

deduction and miscellaneous “other” deductions. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

12 
 

 

 

13 

billion (Schedule K), and net income of $322 billion (includes ordinary and investment income, 

average profit of $78,012). The 3.6 million corporations (88 percent of total) we deem a 

business reported gross receipts of $5.6 trillion, gross rents of $39 billion, investment income of 

$230 billion and net income of $320 billion (average profit of $88,526). The proportion of 

business filers that were profitable is slightly higher (66 percent) than the equivalent proportion 

all filers (63 percent). 

Form 1120: C Corporations 

For tax year 2007, 1.9 million C corporations filed Form 1120. Those corporations reported 

gross receipts of $18.2 trillion, gross rents of $102 billion, investment income of $3.7 trillion 

(mostly interest) and net income of $1.1 trillion (average profit of $568,830). The 1.6 million 

corporations (88 percent of total) we deem a business reported gross receipts of $18.2 trillion, 

gross rents of $102 billion, investment income of $3.7 trillion and net income of $1.1 trillion 

(average profit of $648,027). The proportion of business filers that were profitable is slightly 

higher (58 percent) than the equivalent proportion all filers (55 percent). 

For tax year 2010, 1.7 million C corporations filed Form 1120. Those corporations reported 

gross receipts of $17.5 trillion, gross rents of $83 billion, investment income of $2.7 trillion 

(mostly interest) and net income of $.8 trillion (average profit of $479,311). The 1.4 million 

corporations (86 percent of total) we deem a business reported gross receipts of $17.5 trillion, 

gross rents of $83 billion, investment income of $2.7 trillion and net income of $.8 trillion 

(average profit of $552,490). The proportion of business filers that were profitable is slightly 

higher (55 percent) than the equivalent proportion all filers (52 percent). 

At the bottom of Table 1, we show totals for all filers that qualify as a business based on the two 

tests we apply. We retain more than one half in both 2007 and 2010 (55 and 53 percent, 

respectively) of all entities that file a business return. Those entities reported nearly all total 

income and net income of the full population of filers in both 2007 and 2010. On average, the 

entities we exclude reported total income of $11,839 in 2007 and $10,328 in 2010 while 

reporting net income of $7,743 in 2007 and $6,005 in 2010. 

III. Identification of Small Businesses 

In the previous section, we applied two tests to separate filers into business and non-business 

groups. Those tests represent one possible method to distinguish businesses from other 

taxpayers, and we recognize that any such attempt must rely on subjective criteria. Similarly, 

there is no single definition or unique set of characteristics that should always be used to 

distinguish small businesses from their larger counterparts; an appropriate definition in one 

context might be inappropriate for other purposes. The tax code reflects this ambiguity because 

it contains no explicit definition of small business. Rather, various code sections grant favorable 

tax treatment to certain filers based on their level of investment, taxable income, or gross 

receipts. Some examples are as follows27: 

27 For descriptions of these and other tax code provisions that provide favorable tax treatment to businesses based 

on size, see Gary Guenther, “Small Business Tax Benefits: Overview of Current Law and Economic Justification,” 

CRS Report, April 19, 2010. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

13 
 

 

 

 

 

 

 

 

 

14 

• Expensing of Investment. Under IRC Section 179, for qualified investment placed in 

service during tax year 2007 (the year from which our data are drawn), eligible firms 

could expense up to $125,000 of qualified investment (generally machinery, equipment 

and software); if firms had qualifying investment that exceeded $500,000, then the 

expensing deduction was phased-out dollar-for-dollar for investment above that limit. 

For 2008 and 2009, the limits were raised to $250,000 (expensing) and $800,000 

(beginning of phase out); for 2010 and 2011, the limits were raised to $500,000 and $2 

million, respectively. For 2012, the expensing limits decline to $125,000 and $500,000 

(indexed for inflation from 2006). For 2013, the limits revert to $25,000 and $200,000.28 

• Graduated Corporate Rates. C corporations face a graduated rate schedule based on their 

reported taxable income: 15 percent (taxable income less than $50,000), 25 percent 

($50,000 to $75,000), 34 percent ($75,000 to $18.3 million, but certain income faces 

surcharges within that range to eliminate the benefit of lower rates) and 35 percent 

(greater than $18.3 million). 

• Business Start-Up Costs. Under IRC Section 195, a business can elect to deduct up to 

$5,000 ($10,000 for 2010) of start-up expenditures in the taxable year in which the active 

trade or business begins. The $5,000/$10,000 amount is reduced dollar-for-dollar by the 

amount that cumulative start-up expenditures exceed $50,000 ($60,000 for 2010). Startup expenditures that are not deductible in the year the active trade or business begins are, 

at the taxpayer's election, amortized over a 15-year period. Otherwise, taxpayers must 

capitalize those expenses. 

• Cash Method Accounting. Under IRC Section 446, firms must use the same method of 

accounting for financial and tax purposes. In general, firms that maintain inventories 

must use the accrual method to compute taxable income. Section 448 prohibits 

corporations and partnerships with corporate partners from using cash method 

accounting. However, an exception is made if average annual gross receipts from the 

prior three years is less than $5 million. IRS Revenue Procedure 2002-28 extends cash 

method accounting to firms in “non-inventory intensive” industries if they have average 

annual gross receipts that are less than $10 million. 

• Simplified Dollar-Value LIFO. Businesses that maintain inventories generally use “firstin-first-out” (FIFO) or “last-in-first-out” (LIFO) inventory valuation methods. Under 

IRC Section 474, firms with average annual gross receipts of $5 million or less in the 

previous three years may use a simplified version dollar-value LIFO. 

Because many tax code provisions use gross receipts to identify firms eligible for preferential 

treatment and because filers do not report the number of employees on their tax returns, we use a 

total income threshold to separate small businesses from their larger counterparts. We define 

total income as the sum of gross receipts, rents and any portfolio income reported by the firm.29 

28 These limits reflect changes enacted by various acts, including The Small Business and Work Opportunity Tax 

Act of 2007, The Economic Stimulus Act of 2008, The American Recovery and Reinvestment Act of 2009, The 

Small Business Jobs Act of 2010, and The Tax Relief and Unemployment Insurance Reauthorization and Job 

Creation Act of 2010. 

29 For these purposes, we include “other income” reported by the firm on the front page of the tax form or schedule. 

We continue to use absolute values for income fields that can be negative, such as sales of business assets. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

14 
 

 

 

15 

We set the small business threshold at $10 million of total income. Because deductions can 

reflect the scale of operations, we also require that total deductions not exceed $10 million.30 

Table 2 presents results from the application of the $10 million total income and deduction 

threshold to all entities deemed a business in Table 1. In both 2007 and 2010, the vast majority 

of entities deemed a business also qualify as a small business. Small businesses reported roughly 

the same of proportion of all business income sources in 2010 as in 2007: less than 20 percent of 

gross receipts, approximately 70 percent of gross rental income, 8 percent of gross investment 

income and 17 percent of net income. Furthermore, small businesses in 2007 and 2010 had a 

larger share of all business losses (43 and 38 percent, respectively) than all business profits (23 

and 24 percent). 

Tables 3 through 6 present small business tabulations based on total income, net income, 

industry, and employer/non-employer status. As shown by Table 3, just over one-half (52 

percent) of small businesses reported total income of less than $50,000 in 2007. In 2010, this 

percentage increased to 54 percent. Of these firms, 40 percent reported a loss for the tax year in 

2007. In 2010, 41 percent of these firms reported a loss for the tax year. By comparison, 35 

percent of entities reporting total income in excess of $50,000 reported a tax loss 2007 and 37 

percent in 2010. The smallest groups likely include many start-up firms that will either fail or 

grow and transition to profit after several years. 

Table 4 presents small business tabulations based on net income. In 2007, 38 percent of entities 

reported a tax loss and 87 percent reported a profit less than $50,000. For those groups, gross 

receipts comprised the majority (90 percent) of their reported income. By comparison, only 0.5 

percent of small businesses reported a profit in excess of $1 million. For those filers, 52 percent 

of their reported income was attributable to investment or rental income. In 2010, 39 percent of 

entities reported a tax loss and 88 percent reported a profit less than $50,000. For those groups, 

gross receipts comprised the majority (90 percent) of their reported income. By comparison, 

only 0.3 percent of small businesses reported a profit in excess of $1 million. For those filers, 47 

percent of their reported income was attributable to investment or rental income. 

Table 5 presents small business tabulations based on industry. In 2007, 50 percent of small 

businesses reside in the construction, real estate or professional-scientific sectors. Entities in 

those sectors reported 38 percent of total income and 47 percent of net income. Due to Form 

1040 Schedule F filers, only the agriculture sector reported an overall tax loss. In 2010, 49 

percent of small businesses reside in the construction, real estate or professional-scientific 

sectors. Entities in those sectors reported 35 percent of total income and 40 percent of net 

income. In 2010, no sector reported an overall tax loss. 

Table 6 separates small businesses into employers and non-employers. We classify an entity as 

an “employer” if direct labor deductions (wage-salary expenses) exceed $5,000, as per our first 

business test. For corporations, we continue to exclude payments to officers from direct labor 

expenses. However, for sole proprietors, we include expenses for “contract labor” (line 11, 

Schedule C) because much of those expenses relate to the employment of independent 

30 If we double the small business threshold from $10 to $20 million, then we add approximately 110,000 entities 

that report average total income of $13.2 million and average net income of $1.1 million. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

15 
 

 

 

16 

contractors that are similar to employees of the business.31 (Other business filers do not 

separately itemize expenses for contract labor.) To the extent that payments to contract labor are 

also reported on a business tax return by the recipients and included in our small business group, 

the number of employers will be overstated. Finally, we count all Schedule E Rental Real 

Estate Income filers as non-employers, although it is likely that a small proportion have labor 

expenses.32 

Based on these criteria, we find that 21 percent of small businesses qualify as an employer in 

2007. Employers were considerably larger than non-employers and reported 71 percent of total 

small business income and 43 percent of total net income. In 2010, 20 percent of small 

businesses qualify as an employer. Employers were considerably larger than non-employers and 

reported 71 percent of total small business income and 47 percent of total net income. 

31 Per the Schedule C instructions: “Contract labor includes payments to persons you do not treat as employees (for 

example, independent contractors) for services performed for your trade or business. Do not include contract labor 

deducted elsewhere on your return, such as contract labor that is includible on line 17 (legal and professional 

services), 21 (repairs and maintenance), 26 (wages) or 37 (cost of labor, Schedule A).” 

32 For Schedule E filers, we do not have the information necessary to make this computation. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018

16 
Table 1a: Business Versus Non-Business Filers 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net Net Avg Net 

of Filers Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

All Filers 23,175 1,351 na 20 1,371 59,177 335 -55 280 12,069 

Business 10,684 1,266 na 18 1,284 120,209 268 -45 223 20,854 

Non-Business 12,491 85 na 2 87 6,974 66 -10 57 4,555 

Schedule E: Rent 

All Filers 9,636 na 255 na 255 26,456 57 -74 -18 -1,825 

Business 4,593 na 212 na 212 46,238 38 -60 -22 -4,755 

Non-Business 5,043 na 43 na 43 8,442 18 -14 4 844 

Schedule F: Farmers 

All Filers 2,511 107 na 26 134 53,254 14 -27 -13 -5,295 

Business 1,415 106 na 25 130 92,194 12 -25 -13 -9,208 

Non-Business 1,095 2 na 1 3 2,940 2 -2 0 -239 

Form 1065: Partnerships 

All Filers 3,096 3,900 424 1,848 6,172 1,993,325 1,857 -345 1,512 488,319 

Business 2,300 3,888 417 1,743 6,048 2,629,841 1,732 -317 1,415 615,282 

Non-Business 797 12 7 105 124 155,666 125 -28 97 121,771 

Form 1120-S: S Corporations 

All Filers 3,990 5,974 39 290 6,302 1,579,574 509 -84 424 106,369 

Business 3,554 5,973 38 284 6,295 1,770,991 501 -82 419 117,914 

Non-Business 436 2 0 6 8 17,745 8 -2 5 12,167 

Form 1120: C Corporations 

All Filers 1,865 18,243 102 3,666 22,011 11,800,554 1,308 -247 1,061 568,723 

Business 1,638 18,242 102 3,661 22,005 13,433,466 1,305 -247 1,058 646,119 

Non-Business 227 1 0 4 6 24,478 3 -1 2 10,566 

TOTAL 

All Filers 44,273 29,576 819 5,850 36,245 818,663 4,079 -833 3,246 73,315 

Business 24,184 29,474 769 5,731 35,974 1,487,498 3,856 -776 3,080 127,374 

Non-Business 20,089 102 50 119 271 13,466 221 -57 165 8,235 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 1b: Business Versus Non-Business Filers 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net Net Avg Net 

of Filers Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

All Filers 23,005 1,172 na 19 1,191 51,770 323 -56 267 11,606 

Business 9,858 1,076 na 17 1,093 110,871 245 -46 199 20,186 

Non-Business 13,147 96 na 2 98 7,454 78 -10 68 5,172 

Schedule E: Rent 

All Filers 10,102 na 274 na 274 27,123 63 -67 -4 -396 

Business 4,944 na 228 na 228 46,114 42 -53 -11 -2,225 

Non-Business 5,158 na 46 na 46 8,919 21 -14 7 1,357 

Schedule F: Farmers 

All Filers 2,444 118 na 36 154 63,015 17 -24 -7 -2,864 

Business 1,452 117 na 35 152 104,711 16 -23 -7 -4,822 

Non-Business 992 1 na 1 2 2,016 1 -1 0 0 

Form 1065: Partnerships 

All Filers 3,248 4,010 470 1,166 5,646 1,738,043 1,421 -445 976 300,448 

Business 2,468 4,007 463 1,120 5,590 2,264,886 1,336 -405 931 377,211 

Non-Business 780 3 7 46 56 71,761 85 -40 45 57,665 

Form 1120-S: S Corporations 

All Filers 4,128 5,567 40 237 5,844 1,415,851 411 -89 322 78,012 

Business 3,615 5,566 39 230 5,835 1,614,219 406 -86 320 88,526 

Non-Business 513 1 1 7 9 17,551 5 -3 2 3,900 

Form 1120: C Corporations 

All Filers 1,671 17,491 83 2,654 20,228 12,104,244 1,180 -379 801 479,311 

Business 1,444 17,491 83 2,650 20,224 14,001,961 1,176 -378 798 552,490 

Non-Business 227 0 0 4 4 17,638 4 -1 3 13,229 

TOTAL 

All Filers 44,599 28,358 867 4,112 33,337 747,491 3,415 -1,060 2,355 52,804 

Business 23,781 28,257 813 4,052 33,122 1,392,766 3,221 -991 2,230 93,771 

Non-Business 20,817 101 54 60 215 10,328 194 -69 125 6,005 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 2a: Business Versus Small Business Filers 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

of Filers Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

Business 10,684 1,266 na 18 1,284 120,209 268 -45 223 20,854 

Small Business 10,679 1,121 na 15 1,136 106,409 265 -43 222 20,742 

Schedule E: Rent 

Business 4,593 na 212 na 212 46,238 38 -60 -22 -4,755 

Small Business 4,592 na 208 na 208 45,316 38 -59 -21 -4,628 

Schedule F: Farmers 

Business 1,415 106 0 25 130 92,194 12 -25 -13 -9,208 

Small Business 1,415 100 0 24 125 88,090 12 -25 -13 -9,049 

Form 1065: Partnerships 

Business 2,300 3,888 417 1,743 6,048 2,629,841 1,732 -317 1,415 615,282 

Small Business 2,232 702 279 182 1,163 521,163 300 -133 167 74,836 

Form 1120-S: S Corporations 

Business 3,554 5,973 38 284 6,295 1,770,991 501 -82 419 117,914 

Small Business 3,462 2,297 30 90 2,418 698,345 228 -59 169 48,671 

Form 1120: C Corporations 

Business 1,638 18,242 102 3,661 22,005 13,433,466 1,305 -247 1,058 646,119 

Small Business 1,563 1,336 4 65 1,405 899,097 49 -55 -6 -3,679 

TOTALS 

Business 24,184 29,474 769 5,731 35,975 1,487,559 3,857 -776 3,080 127,375 

Small Business 23,942 5,557 521 377 6,455 269,601 891 -374 517 21,601 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 2b: Business Versus Small Business Filers 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

of Filers Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

Business 9,858 1,076 0 17 1,093 110,871 245 -46 199 20,186 

Small Business 9,855 985 0 14 999 101,368 241 -42 199 20,192 

Schedule E: Rent 

Business 4,944 0 228 0 228 46,114 42 -53 -11 -2,225 

Small Business 4,944 0 223 0 223 45,105 41 -52 -11 -2,225 

Schedule F: Farmers 

Business 1,452 117 0 35 152 104,711 16 -23 -7 -4,822 

Small Business 1,451 110 0 34 144 99,219 16 -22 -6 -4,134 

Form 1065: Partnerships 

Business 2,468 4,007 463 1,120 5,590 2,264,886 1,336 -405 931 377,211 

Small Business 2,398 686 309 123 1,118 466,211 242 -150 92 38,364 

Form 1120-S: S Corporations 

Business 3,615 5,566 39 230 5,835 1,614,219 406 -86 320 88,526 

Small Business 3,531 2,179 31 77 2,287 647,648 192 -61 131 37,097 

Form 1120: C Corporations 

Business 1,444 17,491 83 2,650 20,224 14,001,961 1,176 -378 798 552,490 

Small Business 1,377 1,071 4 58 1,133 822,943 37 -55 -18 -13,074 

TOTALS 

Business 23,781 28,257 813 4,052 33,122 1,392,766 3,221 -991 2,230 93,771 

Small Business 23,557 5,031 567 306 5,904 250,630 769 -382 387 16,428 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018 
Table 3a: Small Business Detail by Total Income 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Reported Total Income Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

< 0 132 1 0 -19 -18 -138,765 0 -31 -30 -230,692 

0 25,000 8,178 68 38 5 111 13,591 17 -99 -82 -9,985 

25,001 50,000 4,220 107 41 5 153 36,204 41 -27 13 3,144 

50,001 75,000 2,134 97 31 5 133 62,199 36 -17 18 8,571 

75,001 100,000 1,519 113 21 10 144 94,539 36 -14 23 14,858 

100,001 250,000 3,432 455 76 27 557 162,353 125 -38 86 25,201 

250,001 500,000 1,722 526 64 31 620 360,134 108 -31 77 44,865 

500,001 1,000,000 1,173 724 68 43 835 711,842 107 -35 73 61,982 

1,000,001 5,000,000 1,244 2,301 150 173 2,623 2,108,715 288 -69 219 175,747 

5,000,001 10,000,000 188 1,164 33 99 1,297 6,890,590 133 -13 120 637,992 

TOTAL 23,942 5,556 521 377 6,455 269,590 891 -373 517 21,601 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018 
Table 3b: Small Business Detail by Total Income 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Reported Total Income Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

< 0 70 0 1 -30 -29 -409,075 1 -38 -37 -526,117 

0 25,000 8,211 60 43 -2 101 12,281 18 -98 -80 -9,729 

25,001 50,000 4,395 105 48 3 155 35,298 42 -28 15 3,305 

50,001 75,000 2,123 95 30 5 131 61,547 36 -16 20 9,643 

75,001 100,000 1,313 88 22 4 114 86,771 31 -10 21 15,853 

100,001 250,000 3,328 417 84 27 528 158,709 116 -37 79 23,874 

250,001 500,000 1,668 485 70 38 594 355,942 101 -31 70 41,910 

500,001 1,000,000 1,132 675 72 46 793 700,605 98 -34 64 56,597 

1,000,001 5,000,000 1,156 2,116 160 138 2,413 2,088,057 226 -76 150 129,926 

5,000,001 10,000,000 161 988 37 78 1,103 6,854,896 100 -15 85 528,268 

TOTAL 23,557 5,031 567 306 5,904 250,616 770 -382 388 16,455 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018 
Table 4a: Small Business Detail by Reported Net Income 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Reported Net Income Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

-10,000,000 -1,000,001 44 44 12 -6 50 1,129,172 0 -102 -102 -2,300,062 

-1,000,000 -100,001 484 368 58 12 437 904,098 0 -124 -124 -256,042 

-100,000 -50,001 589 187 25 5 216 367,586 0 -41 -41 -68,874 

-50,000 -1 7,982 705 97 19 822 102,933 0 -107 -107 -13,383 

0 25,000 9,315 1,156 70 31 1,258 135,073 85 0 85 9,092 

25,001 50,000 2,347 628 35 16 678 288,996 83 0 83 35,437 

50,001 100,000 1,578 715 46 19 779 493,652 111 0 111 70,191 

100,001 250,000 1,029 818 64 33 914 888,971 159 0 159 154,159 

250,001 500,000 327 442 46 34 522 1,596,634 113 0 113 346,191 

500,001 1,000,000 139 281 34 35 351 2,530,207 96 0 96 694,560 

1,000,001 10,000,000 109 212 35 179 427 3,919,741 244 0 244 2,240,228 

TOTAL 23,942 5,556 521 377 6,455 269,606 891 -373 517 21,607 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 4b: Small Business Detail by Reported Net Income 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Reported Net Income Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

-10,000,000 -1,000,001 49 46 17 -29 34 698,446 0 -117 -117 -2,414,998 

-1,000,000 -100,001 459 360 69 -6 422 918,658 0 -122 -122 -266,218 

-100,000 -50,001 547 172 24 2 199 364,036 0 -38 -38 -69,272 

-50,000 -1 8,146 708 110 16 834 91,720 0 -105 -105 -12,843 

0 25,000 9,093 1,003 81 31 1,115 481,948 84 0 84 9,228 

25,001 50,000 2,313 579 37 21 636 422,073 82 0 82 35,408 

50,001 100,000 1,508 639 48 28 715 752,796 105 0 105 69,827 

100,001 250,000 950 722 68 43 833 2,884,826 146 0 146 153,434 

250,001 500,000 289 377 44 36 458 3,656,431 99 0 99 342,356 

500,001 1,000,000 125 246 34 42 322 4,091,426 87 0 87 691,715 

1,000,001 10,000,000 79 179 35 122 336 4,260,706 167 0 167 2,126,221 

TOTAL 23,557 5,031 567 306 5,904 250,616 770 -382 388 16,455 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018 
Table 5a: Small Business Detail by Industry 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Agriculture 1,786 189 2 42 233 130,448 27 -33 -6 -3,487 

Mining-Utilities 133 55 0 9 64 483,952 16 -8 8 59,740 

Construction 2,609 923 3 13 939 359,866 77 -26 51 19,504 

Manufacturing 451 366 0 8 375 831,351 25 -16 9 19,785 

Wholesale 538 476 0 9 485 902,227 27 -9 19 34,386 

Retail 1,738 859 1 14 874 502,699 38 -20 17 9,835 

Transportation 1,019 230 1 7 238 233,676 20 -7 13 12,490 

Information 237 79 0 4 83 350,856 10 -10 0 715 

Financial 755 184 2 113 299 395,952 121 -31 90 119,527 

Real Estate and Rental 7,067 246 509 99 855 120,979 223 -139 84 11,880 

Professional and Technical 2,266 619 1 20 639 282,229 133 -25 107 47,287 

Administrative and Support 1,010 234 0 5 239 236,764 25 -7 18 18,039 

Educational Services 177 22 0 0 23 128,972 3 -1 2 10,108 

Health Care and Social Service 1,250 452 1 15 468 374,209 83 -9 74 59,096 

Arts and Entertainment 562 83 0 5 88 156,740 14 -8 6 9,950 

Accommodation and Food 627 297 1 7 306 487,774 21 -14 7 10,685 

All Other Services 1,718 239 0 7 247 143,529 28 -8 20 11,436 

TOTAL 23,942 5,556 522 377 6,455 269,602 891 -373 517 21,600 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 5b: Small Business Detail by Industry 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Agriculture 1,791 195 2 57 255 142,359 30 -30 0 -116 

Mining-Utilities 129 49 1 10 60 466,227 14 -11 3 23,171 

Construction 2,192 641 3 10 654 298,294 51 -26 25 11,433 

Manufacturing 396 307 0 6 313 791,545 21 -15 6 15,200 

Wholesale 542 460 0 7 467 862,161 25 -11 14 26,116 

Retail 1,622 790 1 13 804 495,579 34 -18 16 9,847 

Transportation 942 210 0 4 214 227,620 18 -8 10 10,460 

Information 254 72 0 3 76 297,590 10 -9 1 2,327 

Financial 677 152 2 87 242 356,736 95 -40 56 82,261 

Real Estate and Rental 7,325 190 554 55 799 109,128 168 -141 27 3,750 

Professional and Technical 2,317 614 1 18 633 273,076 128 -25 103 44,508 

Administrative and Support 999 212 0 4 216 216,525 25 -6 19 18,717 

Educational Services 212 27 0 0 27 128,674 4 -1 2 11,368 

Health Care and Social Service 1,296 485 1 14 499 385,310 89 -10 79 61,267 

Arts and Entertainment 550 84 0 4 88 159,883 13 -8 5 8,735 

Accommodation and Food 634 314 1 6 321 507,029 17 -15 3 4,263 

All Other Services 1,679 228 0 7 235 139,726 27 -8 19 11,242 

TOTAL 23,557 5,031 567 306 5,904 250,616 770 -382 388 16,455 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 6a: Small Business Employers 

tax year 2007, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

Employers 1,659 572 0 6 579 348,739 91 -12 79 47,838 

Non-Employers 9,020 549 0 9 558 61,833 174 -32 142 15,760 

Schedule E: Rent /3 

Employers 0 0 0 0 0 0 0 0 0 0 

Non-Employers 4,592 0 208 0 208 45,316 38 -59 -21 -4,628 

Schedule F: Farmers 

Employers 126 42 0 10 52 413,932 3 -6 -3 -20,734 

Non-Employers 1,289 58 0 15 73 56,342 8 -19 -10 -7,911 

Form 1065: Partnerships 

Employers 533 514 102 32 648 1,215,281 92 -47 45 84,395 

Non-Employers 1,698 188 177 150 515 303,265 208 -86 122 71,834 

Form 1120-S: S Corporations 

Employers 1,760 1,988 11 48 2,047 1,163,103 151 -41 110 62,672 

Non-Employers 1,702 309 19 43 371 217,803 77 -18 58 34,178 

Form 1120: C Corporations 

Employers 864 1,186 3 42 1,232 1,424,937 33 -41 -8 -9,604 

Non-Employers 699 150 1 23 174 248,571 16 -13 3 3,636 

TOTAL 

Employers 4,942 4,303 116 138 4,557 922,108 370 -146 224 45,276 

Non-Employers 19,000 1,253 406 239 1,898 99,887 520 -227 293 15,442 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

3/ Schedule E Rental Income filers do not itemize expenses related to the employment of individuals. For the purposes of this table, we count all 

 Schedule E filers as non-employers. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018
Table 6b: Small Business Employers 

tax year 2010, billions of dollars, thousands of filers 

Total Income Detail Net Income Detail 

Number Gross Gross Other Total Avg Total Pos Net Neg Net All Net Avg Net 

Firms Receipts Rents 1/ Income 2/ Income Income Income Income Income Income 

Schedule C: Sole Proprietors 

Employers 1,510 516 0 6 522 345,656 82 -13 69 45,690 

Non-Employers 8,345 468 0 8 476 57,040 159 -29 130 15,578 

Schedule E: Rent /3 

Employers 0 0 0 0 0 0 0 0 0 0 

Non-Employers 4,944 0 223 0 223 45,105 41 -52 -11 -2,225 

Schedule F: Farmers 

Employers 131 46 0 13 59 451,850 4 -5 -1 -7,658 

Non-Employers 1,321 65 0 21 86 65,114 12 -17 -5 -3,786 

Form 1065: Partnerships 

Employers 552 522 112 20 654 1,184,637 83 -48 35 63,398 

Non-Employers 1,846 164 197 103 464 251,356 159 -102 57 30,878 

Form 1120-S: S Corporations 

Employers 1,769 1,899 11 44 1,954 1,104,555 132 -39 93 52,571 

Non-Employers 1,762 280 20 33 333 188,968 61 -22 39 22,131 

Form 1120: C Corporations 

Employers 744 945 2 38 985 1,323,681 25 -39 -14 -18,814 

Non-Employers 633 127 1 20 148 233,944 12 -16 -4 -6,323 

TOTAL 

Employers 4,706 3,928 125 121 4,174 886,955 326 -144 182 38,674 

Non-Employers 18,851 1,104 441 185 1,730 91,774 444 -238 206 10,928 

1/ For partnerships and S corporations, includes any gross rents reported on Form 8825. 

2/ For partnerships and S corporations, includes all income reported on Schedule K, except net rental real estate income.

 For partnerships and all corporations, includes net capital gains, dividends, royalties, interest and miscellaneous other income. 

3/ Schedule E Rental Income filers do not itemize expenses related to the employment of individuals. For the purposes of this table, we count all 

Schedule E filers as non-employers. 

U.S. Department of the Treasury 

Office of Tax Analysis 

December 21, 2018