Figuring Gross Profit

Introduction

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Minus: Items withdrawn for personal use	2,650	283,250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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