That’s the big takeaway from recently released IRS statistics on sole proprietorships for 2021. In fact, profits were up 22%. These stats are derived from Schedule C of Form 1040 or 1040-SR and show the contrast to the number of such filers and their revenue on 2020 returns. This is a subject we cover every year, as you can see in last year’s blog. The following focuses only on nonfarm sole proprietors; it doesn’t reflect farmers and ranchers who are sole proprietors filing Schedule F.
Sole proprietorships include
Sole proprietorships include independent contractors, freelancers, other gig economy workers, or other self-employed individuals who are not required to file any other type of income tax return to report their business income expenses. They also include limited liability companies (LLCs) owned by one individual who does not choose to file a corporate return. The number of sole proprietors filing 2021 returns was 29.3 million individuals, a 3.4% increase. Of these, there were 3.1 million single-member LLC returns filed for 2021 (there were only 126,000 in 2001 when the IRS began to track them). One-member LLCs now account for 10.7% of all Schedule C filers (up from just 0.7% in 2001).
Statistics include
Other key statistics for 2021 include:
- Total receipts reported by nonfarm sole proprietorships increased by 16.4%
- Total deductions rose by 9.4%
- Profits jumped to $411.3 billion (22%).
The statistics covered the results across industries (referred to as sectors), including construction; retail and wholesale trade; finance; real estate; professional services; health care; and the arts. The construction sector reported the largest percentage of total business receipts (17.1%) and total business deductions (18.5%). The wholesale trade sector reported the largest percentage increase in business receipts (28.8%). Transportation and warehousing had the largest dollar increase in business receipts, increasing by $38 billion; this sector grew the most in terms of number of returns (up 11.3%).
Sole proprietorship profits (net income less deductions) increased across all sectors. The professional, scientific, and technical services sector reported the largest percentage of total profits of all nonfarm sole proprietorships, with 24.1% ($99.1 billion), and the sector had a $15.2 billion (18.2%) increase in profits for 2021 compared to the previous year. The second largest sector by profits was construction.
The statistics show the breakdown of deductions claimed by sole proprietorships in various industries. On average (and not counting inventory purchases and cost of goods sold), the largest categories of business deductions for Schedule C filers were car and truck expenses, followed by salary and wages, and then contract labor. The smallest expenditures were for depletion, pension and profit-sharing plans, and employee benefit programs. The home office deduction in total was over $12.8 million, but statistics fail to show how many of the 29.3 million sole proprietors claimed any home office deduction. Nearly $87 million was claimed for the qualified business income (QBI) deduction, but again, there’s no indication of how many sole proprietors claimed this write-off.
Analysis for sole proprietorships
Why were profits up so dramatically during the ongoing pandemic in 2021? I’m not an economist, but I suggest some government moves contributed to improved profitability:
- PPP loans were still being made (they were available through May 2021) under the CARES Act
- Individuals who were eligible were receiving the Recovery Rebate Credit and a refundable child tax credit under the American Rescue Act
These measures put more money into the pockets of consumers and small businesses, and obviously, sole proprietorships benefited accordingly.
Final thought
To repeat what was noted in a previous blog: Larry Page, co-founder of Google, said “You don’t need to have a 100-person company to develop that idea.” You can go it alone and be profitable.
While there was a surge in closures of businesses, with closures peaking in the middle of 2021, some began to reopen; reopening grew dramatically in number from mid-2021. Government money likely helped this business activity and contributed to profitability in 2021, as the statistics demonstrate. While the pandemic was still raging during 2021, it didn’t dampen enthusiasm for entrepreneurship.
Where do sole proprietorships stand now? We’ll have to wait for new statistics from the IRS.
