Business Income
The starting point for computing your income tax is, of course,
your gross business receipts or sales. From this, you will subtract
your cost of goods sold (if any) to arrive at your gross profit.
In this section, we'll discuss some rules you need to know about exactly
what is and isn't reportable business income, and the distinctions
between various types of income that must be reported in different
places on your tax return.
The general rule is that any income
you receive that's connected with your business is considered "business
income" and it should be reported on Schedule C, Profit and Loss
from Business. Income is considered "connected with your business"
if it's clear that the payment would not have been made if you did not have
the business.
- Gross income from sales is the gross
income you receive from sales of your product or service to customers.
If you are a statutory employee, this is where you report your income.
In most cases, this will be the bulk of the income you receive from
actually operating your business. Income is reported on Line 1 of
Schedule C.
- Miscellaneous business income refers
to miscellaneous types of income that are not sales revenue. On Schedule
C, it is reported on Line 6. This area is where questions arise and
the answers can sometimes get complicated, since some types of income
that you might consider to be business-related must be reported on
other areas of your tax return.
- Cost of goods sold must be computed
if your business uses inventory (and you do not qualify to use the
cash method of accounting) in order to complete the business income
portion of your tax return.
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