What Is Business Gross Income and How Is It Calculated?
Gross income of a business is the total income from all sources before subtracting adjustments, exemptions, or deductions allowed by law. The term "gross" in a financial sense means an initial amount before any deductions, expenses, or withholdings. In accounting and financial terms, you always go from gross to net.
Gross business income is an amount calculated on a business tax return as the total business sales less cost of goods sold (COGS). It appears on the income statement (profit and loss statement) of a business as a starting figure, then it is reduced by returns/allowances and other deductions to get net income or net earnings.
Gross income for a business that runs on the cash method is all items of income that the business constructively received during the tax year.
The terms "gross" and "net" are sometimes confusing. "Gross" means a total, and "net" is the amount left over after deduction. For example, gross pay is the total pay owed to the employee; net pay is the pay after withholding and deductions.
What Gross Business Income Is Not
Employee Gross Pay
Gross pay for an individual is the amount on that person's paycheck before any withholding or deductions. Personal gross income from employment is calculated for hourly workers by multiplying the hours worked by the hourly rate (including overtime). For salaried workers, it's calculated by dividing the annual income by the number of pay periods.
Adjusted Gross Income (AGI)
AGI is a calculation on a personal tax return. It's gross income minus adjustments. These adjustments include such items as educator expenses, student loan interest, alimony payments, or contributions to a retirement account. Adjusted gross income is calculated on Form 1040.
Modified Adjusted Gross Income (MAGI) for an Individual
This figure is used to determine whether you can contribute to an IRA or qualify for certain other benefits, including education tax benefits and some income tax credits. For many people, MAGI is identical or very close to adjusted gross income. It doesn't include foreign income, nontaxable Social Security benefits, tax-exempt interest, or Supplemental Security Income. You won't see MAGi on your tax return.
Gross Revenue or Sales of Your Business
Gross revenue or gross sales is the amount of money the business brings in through sales. Gross revenue is the most comprehensive income, and it is the first item in the calculation of gross income. Gross revenue may be reduced by discounts and returns.
Gross profit is gross revenue or sales minus the cost of producing that revenue. Gross profit includes a calculation for the cost of goods sold, for businesses that sell products. Gross income includes income from other sources than sales.
Sometimes called profits or earnings, net income is calculated by subtracting all deductions, tax credits, and cost of goods sold from the gross income number.
Gross Income for Individuals
For an individual taxpayer, gross income includes all income you receive as money, goods, property, and services that is not exempt from tax. It includes income you receive from outside the U.S, and it includes part of Social Security benefits.
Gross income includes wages, dividends, capital gains, business income, and retirement distributions. It doesn't include other types of non-operations income like
Gross Income in Business Financial Analysis
Gross income is usually the result of the operations of a business. The "operations" are the day-to-day activities of what the business sells. Your business gross income is used in several calculations to determine the profitability and viability of your business.
Gross Profit Margin
One key financial ratio is gross profit margin or the percentage of revenue /sales remaining after subtracting cost of goods sold. The calculation is gross profit (gross income) divided by total sales. This calculation results in a percentage—the higher the percentage the better.
For example, if gross profit (income) is $400,000 and sales are $1,000,000, the margin is 40%.That means your business sold $1 million in products and its cost of sales was $600,000.
Calculating Gross Income for Business Income Taxes
A calculation of gross income appears on the tax forms for all business types. We'll use Schedule C for small businesses as an example.
In Part 1 of Schedule C:
Line 1 Enter the total gross receipts or sales of the business.
Line 2 Deduct returns and allowances (like discounts).
Line 3 Subtract Line 2 from Line 1.
Line 4 Enter the cost of goods sold (COGS). COGS is calculated on a separate schedule and the total is entered here. Cost of goods sold isn't applicable for service businesses.
Line 5 Calculate gross income, using this formula: Gross receipts minus returns and allowances minus cost of goods sold equals gross profit.
Line 6 Enter the total of other income, including certain tax credits and refunds and recovery of bad debts.
Line 7 Enter the total of gross profit and other income to get gross income.
Gross Receipts vs. Gross Profit vs. Gross Income
Gross receipts are the starting amount.
Gross profit is gross receipts minus returns and allowances minus cost of goods sold.
Gross income is gross profit plus other income.
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Consumer.gov. "Your Paycheck." Accessed June 1, 2020.
IRS. "Form 1040 U.S. Individual Income Tax Return." Accessed June 1, 2020.
HealthCare.gov. "What to Include as Income." Accessed June 1, 2020.
HelthCare.gov. "Modified Adjusted Gross Income (MAGI)." Accessed June 1, 2020.
IRS. "About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)." Accessed June 1, 2020.
IRS. "Gross Income." Accessed June 1, 2020.
IRS. "Instructions for Schedule C," Page C-6. Accessed June 1, 2020.