After you have figured the gross receipts from your business
(chapter 5) and the cost of goods sold (chapter 6), you are ready to
figure your gross profit. You must determine gross profit before you
can deduct any business expenses. These expenses are discussed in
chapter 8.
If you are filing Schedule C-EZ, your gross profit is your
gross receipts plus certain other amounts, explained later under
Additions to Gross Profit.
Businesses that sell products.
If you are filing Schedule C, figure your gross profit by first
figuring your net receipts. Figure net receipts on Schedule C by
subtracting any returns and allowances (line 2) from gross receipts
(line 1). Returns and allowances include cash or credit refunds you
make to customers, rebates, and other allowances off the actual sales
price.
Next, subtract the cost of goods sold (line 4) from net receipts
(line 3). The result is the gross profit from your business.
Businesses that sell services.
You do not have to figure the cost of goods sold if the sale of
merchandise is not an income-producing factor for your business. Your
gross profit is the same as your net receipts (gross receipts minus
any refunds, rebates, or other allowances). Most professions and
businesses that sell services rather than products can figure gross
profit directly from net receipts in this way.
Illustration.
This illustration of the gross profit section of the income
statement of a retail business shows how gross profit is figured.
Income Statement
Year Ended December 31, 2001
| Gross receipts |
$400,000 |
| Minus: Returns and
allowances |
14,940 |
| Net receipts |
$385,060 |
| Minus: Cost of goods
sold |
288,140 |
| Gross
profit |
$96,920 |
The cost of goods sold for this business is figured as follows:
| Inventory at
beginning of year |
$37,845 |
| Plus: Purchases |
$285,900 |
|
| Minus: Items withdrawn for personal
use |
2,650 |
283,250 |
| Goods
available for sale |
$321,095 |
| Minus:
Inventory at end of year |
32,955 |
| Cost of
goods sold |
$288,140 |
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