Your tax year, often referred to as your accounting period, can be a calendar year or a fiscal year. (A fiscal year is a 12-month span that concludes on the last day of any month except December.) If you've previously submitted a tax return for your business, you've established a tax year. It’s essential to continue using the same tax year you selected initially unless you receive permission from the IRS to make a change.

Any income you earn that relates to your business is classified as business income. Income is connected with your business, if it is evident that the payment would not have occurred without your business presence. To calculate your business income, begin with your total business receipts or sales. From this figure, deduct your cost of goods sold (if applicable).

Ordinary and necessary expenses incurred while operating your business can be deducted from your income. Business expenses are generally deductible if two conditions are met: the expenses were ordinary and necessary and you maintained the records required by the IRS to support your claims. Taking the time and effort to identify every valid deduction you can claim is typically your best strategy for lowering your taxable income (and consequently your tax bill). Additionally, there may be other methods to save even more on taxes, such as deferring income to different tax years or leveraging tax credits.