Generally, you will report your business activity on Schedule C (http://www.irs.gov/pub/irs-pdf/f1040sc.pdf) of form 1040 unless you incorporated or formed a separate business entity. You will report both your gross selling receipts as well as all your expenses on this schedule.

Whether you may deduct the $7,000 depends on what you got. To the extent you received equipment you need to allocate a portion of the $7k and depreciate it. If the remainder of the fee was for services rendered then you may deduct it currently. It would be helpful if you could indicate what you got for the $7k.

Reporting a Small Business Activity

Income you receive from business activity represents your gross revenue as a self-employed individual. From your gross revenue you will deduct expenses you incur to generate your income. Your net income (i.e. gross revenue less expenses) is taxable income subject to both income tax and self-employment tax (if in excess of $400).

Generally, income you earn through your business is treated as income from self-employment. Accordingly, you have two tax issues to worry about. First, to the extent your net profit (i.e. gross funds received in excess of your expenses incurred to produce the income) exceeds $400, you will be subject to self-employment tax. This tax is calculated on Schedule SE (http://www.irs.gov/pub/irs-pdf/f1040sse.pdf) which is attached to your 1040. Second, all of your net profit from the self-employment activity is considered to be taxable income.

You also should be paying Federal estimated income taxes (i.e. income and self-employment) on a quarterly basis once you become profitable. Consider reviewing IRS Pub 505 at http://www.irs.gov/publications/p505/index.html. You need to either calculate your liability and pay in 1/4 each quarter at the mandated times (i.e. 4/15; 6/15; 9/15 and 1/15) or you can pay in 100% of your prior year liability as a safe harbor to prevent the application of underpayment of estimated tax penalties. You do this by completing form 1040-ES (http://www.irs.gov/pub/irs-pdf/f1040es.pdf) and sending in a check with each voucher. You may avoid underpayment of estimated tax penalties by paying in 90% of your current year tax liability or 100% or your prior year tax liability. Your state will also have a similar estimated tax payment regimen. if you give me the state your located in I can estimate yoru tax rate and point you to the appropriate forms.

I also recommend you take a look at the IRS small business website at http://www.irs.gov/businesses/small/index.html. It has a lot of valuable information.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.