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Other Income: Small-Business Taxes (2025 IRS Guide)

This guide covers “Other Income” within small-business taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 334 (2025), Tax Guide for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

You must report on your tax return all income you receive from your business, including income not reported to you on a Form 1099 filed by the payor, unless it is excluded by law. In most cases, your business income will be in the form of cash, checks, and credit card charges. But business income can be in other forms, such as property or services. These and other types of income are explained next.

.If you are a U.S. citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U.S. law. If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. .

Other Income

The following discussion explains how to treat other types of business income you may receive.

Restricted property.

Restricted property is property that has certain restrictions that affect its value. If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C (Form 1040) when the restriction is lifted. However, you can choose to be taxed in the year you receive the property. For more information on including restricted property in income, see Pub. 525, Taxable and Nontaxable Income.

Gains and losses.

Do not report on Schedule C (Form 1040) a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Instead, you must report these gains and losses on other forms. For more information, see chapter 3.

Promissory notes.

Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C (Form 1040). In general, you report them at their stated principal amount (minus any unstated interest) or issue price (for debt instruments with OID) when you receive them.

Lost income payments.

If you reduce or stop your business activities, report on Schedule C (Form 1040) any payment you receive for the lost income of your business from insurance or other sources. Report it on Schedule C (Form 1040) even if your business is inactive when you receive the payment.

Damages.

You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business.

  • Patent infringement.

  • Breach of contract or fiduciary duty.

  • Antitrust injury.

Economic injury.

You may be entitled to a deduction against the income if you receive compensation for actual economic injury. Your deduction is the smaller of the following amounts.

  • The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount.

  • Your loss from the injury that you have not yet deducted.

Punitive damages.

You must also include punitive damages in income.

Kickbacks.

If you receive any kickbacks, include them in your income on Schedule C (Form 1040). However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold.

Recovery of items previously deducted.

If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C (Form 1040). However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion.

Exception for depreciation.

This rule does not apply to depreciation. You recover depreciation using the rules explained next.

Recapture of depreciation.

In the following situations, you have to recapture the depreciation deduction. This means you include in income part or all of the depreciation you deducted in previous years.

Listed property.

If your business use of listed property (explained in chapter 8 under Depreciation) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. You do this by including in income on Schedule C (Form 1040) part of the depreciation you deducted in previous years. Use Part IV of Form 4797 to figure the amount to include on Schedule C (Form 1040). For more information, see What Is the Business-Use Requirement? in chapter 5 of Pub. 946. That chapter explains how to determine whether property is used more than 50% in your business.

Section 179 property.

If you take a section 179 deduction (explained in chapter 8 under Depreciation) for an asset and before the end of the asset’s recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. You do this by including in income on Schedule C (Form 1040) part of the deduction you took. Use Part IV of Form 4797 to figure the amount to include on Schedule C (Form 1040). See chapter 2 of Pub. 946 to find out when you recapture the deduction.

Sale or exchange of depreciable property.

If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. You figure the income due to depreciation recapture in Part III of Form 4797. For more information, see chapter 4 of Pub. 544.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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