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.
If you are filing Schedule C, you figure your gross profit by first
figuring your net receipts. Do this 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.
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, 2000
| 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| Minus: Items withdrawn for personal use |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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