ComplianceLegalFinanceJuly 02, 2020

How to compute business income

Computation of business income begins with reporting your gross receipts or sales. If your business makes or buys goods to sell and maintains an inventory, you're entitled to deduct the cost of goods sold from your revenues in computing your gross profit from your business. Valuation of inventory and identification of inventory items is important to accurately determine your income.

Any income you receive that is connected with your business is considered "business income" that should be reported on your business tax return. Income is "connected with your business" if it's clear that the payment would not have been made if you did not have the business.

The starting point for computing your income tax is your gross business receipts or sales. From this amount, you must subtract your cost of goods sold (if any) to arrive at your gross profit.

This article discusses some rules you need to know about exactly what is and isn't reportable business income. It also touches on the distinctions between various types of income that must be reported in different places on your tax forms.

Sole proprietors, use Schedule C or C-EZ to determine their income and expenses. The resulting income (or loss) is then reported on Form 1040. 

Partnerships (and limited liability companies that are taxed as partnerships) use Form 1065 to determine their income.

Corporations (and limited liability companies who elect to be taxed as corporations) report their income and expenses on Form 1120 (for regular corporations) or Form 1120S (for