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123easytaxfiling com 7. 123easytaxfiling com   Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. 123easytaxfiling com Additions to 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. 123easytaxfiling com You must determine gross profit before you can deduct any business expenses. 123easytaxfiling com These expenses are discussed in chapter 8. 123easytaxfiling com 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. 123easytaxfiling com Businesses that sell products. 123easytaxfiling com   If you are filing Schedule C, figure your gross profit by first figuring your net receipts. 123easytaxfiling com Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). 123easytaxfiling com Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. 123easytaxfiling com   Next, subtract the cost of goods sold (line 4) from net receipts (line 3). 123easytaxfiling com The result is the gross profit from your business. 123easytaxfiling com Businesses that sell services. 123easytaxfiling com   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. 123easytaxfiling com Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). 123easytaxfiling com Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. 123easytaxfiling com Illustration. 123easytaxfiling com   This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. 123easytaxfiling com Income Statement Year Ended December 31, 2013 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for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900   Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. 123easytaxfiling com Gross receipts. 123easytaxfiling com   At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. 123easytaxfiling com You may find it helpful to use cash registers to keep track of receipts. 123easytaxfiling com You should also use a proper invoicing system and keep a separate bank account for your business. 123easytaxfiling com Sales tax collected. 123easytaxfiling com   Check to make sure your records show the correct sales tax collected. 123easytaxfiling com   If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. 123easytaxfiling com   If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. 123easytaxfiling com Inventory at beginning of year. 123easytaxfiling com   Compare this figure with last year's ending inventory. 123easytaxfiling com The two amounts should usually be the same. 123easytaxfiling com Purchases. 123easytaxfiling com   If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. 123easytaxfiling com ) be sure to remove them from the cost of goods sold. 123easytaxfiling com For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. 123easytaxfiling com Inventory at end of year. 123easytaxfiling com   Check to make sure your procedures for taking inventory are adequate. 123easytaxfiling com These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. 123easytaxfiling com   Use inventory forms and adding machine tapes as the only evidence for your inventory. 123easytaxfiling com Inventory forms are available at office supply stores. 123easytaxfiling com These forms have columns for recording the description, quantity, unit price, and value of each inventory item. 123easytaxfiling com Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. 123easytaxfiling com These forms will help satisfy you that the total inventory is accurate. 123easytaxfiling com They will also provide you with a permanent record to support its validity. 123easytaxfiling com   Inventories are discussed in chapter 2. 123easytaxfiling com Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. 123easytaxfiling com First, divide gross profit by net receipts. 123easytaxfiling com The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. 123easytaxfiling com Next, compare this percentage to your markup policy. 123easytaxfiling com Little or no difference between these two percentages shows that your gross profit figure is accurate. 123easytaxfiling com A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. 123easytaxfiling com You should determine the reason for the difference. 123easytaxfiling com Example. 123easytaxfiling com   Joe Able operates a retail business. 123easytaxfiling com On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. 123easytaxfiling com The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. 123easytaxfiling com His cost of goods sold is $200,000. 123easytaxfiling com This results in a gross profit of $100,000 ($300,000 − $200,000). 123easytaxfiling com To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). 123easytaxfiling com The resulting 331/3% confirms his markup percentage of 331/3%. 123easytaxfiling com Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. 123easytaxfiling com The result is gross business income. 123easytaxfiling com If you use Schedule C-EZ, include the income on line 1 of the schedule. 123easytaxfiling com Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. 123easytaxfiling com Prev  Up  Next   Home   More Online Publications

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123easytaxfiling com Index A Addition to property, Additions and Improvements Adjusted basis, Adjusted Basis Alternative Depreciation System (ADS) Recovery periods, Recovery Periods Under ADS Required use, Required use of ADS. 123easytaxfiling com Amended return, Filing an Amended Return Apartment Cooperative, Cooperative apartments. 123easytaxfiling com Rental, Which Property Class Applies Under GDS? Automobile (see Passenger automobile) B Basis Adjustments, Basis adjustment for depreciation allowed or allowable. 123easytaxfiling com , Adjustment of partner's basis in partnership. 123easytaxfiling com , Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 123easytaxfiling com , Basis adjustment due to casualty loss. 123easytaxfiling com Basis for depreciation, What Is the Basis for Depreciation? Casualty loss, Basis adjustment due to casualty loss. 123easytaxfiling com Change in use, Property changed from personal use. 123easytaxfiling com Cost, Cost as Basis Depreciable basis, Depreciable basis. 123easytaxfiling com Other than cost, Other Basis Recapture of clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 123easytaxfiling com Term interest, Basis adjustments. 123easytaxfiling com Unadjusted, Figuring the Unadjusted Basis of Your Property Business use of property, partial, Partial business or investment use. 123easytaxfiling com Business-use limit, recapture of Section 179 deduction, When Must You Recapture the Deduction? Business-use requirement, listed property, What Is the Business-Use Requirement? C Car (see Passenger automobile) Carryover of section 179 deduction, Carryover of disallowed deduction. 123easytaxfiling com Casualty loss, effect of, Basis adjustment due to casualty loss. 123easytaxfiling com Changing accounting method, Changing Your Accounting Method Communication equipment (see Listed property) Commuting, Commuting use. 123easytaxfiling com Computer (see Listed property) Computer software, Computer software. 123easytaxfiling com , Off-the-shelf computer software. 123easytaxfiling com Containers, Containers. 123easytaxfiling com Conventions, Which Convention Applies? Cooperative apartment, Cooperative apartments. 123easytaxfiling com Copyright, Patents and copyrights. 123easytaxfiling com (see also Section 197 intangibles) Correcting depreciation deductions, How Do You Correct Depreciation Deductions? Cost basis, Cost as Basis D Declining balance Method, Declining Balance Method Rates, Declining balance rate. 123easytaxfiling com Deduction limit Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Depreciation Deduction Employee, Can Employees Claim a Deduction? Listed property, Can Employees Claim a Deduction? Determinable useful life, Property Having a Determinable Useful Life Excepted property, Excepted Property Incorrect amount deducted, How Do You Correct Depreciation Deductions? Methods, Which Depreciation Method Applies? Property lasting more than one year, Property Lasting More Than One Year Property owned, Property You Own Property used in business, Property Used in Your Business or Income-Producing Activity Recapture, Revoking an election. 123easytaxfiling com , Recapture of Excess Depreciation Depreciation allowable, Basis adjustment for depreciation allowed or allowable. 123easytaxfiling com Depreciation allowed, Basis adjustment for depreciation allowed or allowable. 123easytaxfiling com Depreciation deduction Listed property, What Is the Business-Use Requirement? Determinable useful life, Property Having a Determinable Useful Life Disposition Before recovery period ends, Sale or Other Disposition Before the Recovery Period Ends General asset account property, Disposing of GAA Property Section 179 deduction, When Must You Recapture the Deduction? E Election ADS, Electing ADS. 123easytaxfiling com , Election of ADS. 123easytaxfiling com Declining balance (150% DB) method, 150% election. 123easytaxfiling com Exclusion from MACRS, Election To Exclude Property From MACRS General asset account, Electing To Use a GAA Not to claim special depreciation allowance, How Can You Elect Not To Claim an Allowance? Section 179 deduction, How Do You Elect the Deduction? Straight line method, Straight line election. 123easytaxfiling com Electric vehicle, Electric Vehicles Employee Depreciation deduction, Can Employees Claim a Deduction? How to claim depreciation, Employee. 123easytaxfiling com Employee deduction, listed property, Can Employees Claim a Deduction? Energy property, Energy property. 123easytaxfiling com Exchange of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion F Farm Property, Depreciation Methods for Farm Property Figuring MACRS Using percentage tables, How Is the Depreciation Deduction Figured? Without using percentage tables, Figuring the Deduction Without Using the Tables Films, Films, video tapes, and recordings. 123easytaxfiling com Free tax services, Free help with your tax return. 123easytaxfiling com G General asset account Abusive transaction, Abusive transactions. 123easytaxfiling com Disposing of property, Disposing of GAA Property Grouping property in, Grouping Property Nonrecognition transaction, Nonrecognition transactions. 123easytaxfiling com General Depreciation System (GDS), recovery periods, Recovery Periods Under GDS Gift (see Basis, other than cost) H Help (see Tax help) I Idle property, Idle Property Improvements, How Do You Treat Repairs and Improvements?, Additions and Improvements Income forecast method, Income Forecast Method Incorrect depreciation deductions, How Do You Correct Depreciation Deductions? Indian reservation Defined, Indian reservation. 123easytaxfiling com Qualified infrastructure property, Qualified infrastructure property. 123easytaxfiling com Qualified property, Qualified property. 123easytaxfiling com Recovery periods for qualified property, Indian Reservation Property Related person, Related person. 123easytaxfiling com Inheritance (see Basis, other than cost) Intangible property Depreciation method, Intangible Property, Income Forecast Method Income forecast method, Income Forecast Method Straight line method, Intangible Property Inventory, Inventory. 123easytaxfiling com Investment use of property, partial, Partial business or investment use. 123easytaxfiling com Involuntary conversion of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion L Land Not depreciable, Land Preparation costs, Land Leased property, Leased property. 123easytaxfiling com Leasehold improvement property, defined, Qualified leasehold improvement property. 123easytaxfiling com , Qualified leasehold improvement property. 123easytaxfiling com Life tenant, Life tenant. 123easytaxfiling com (see also Term interests) Limit on deduction Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Listed property 5% owner, 5% owner. 123easytaxfiling com Computer, Computers and Related Peripheral Equipment Condition of employment, Condition of employment. 123easytaxfiling com Defined, What Is Listed Property? Employee deduction, Can Employees Claim a Deduction? Employer convenience, Employer's convenience. 123easytaxfiling com Improvements to, Improvements to listed property. 123easytaxfiling com Leased, Lessee's Inclusion Amount Passenger automobile, Passenger Automobiles Qualified business use, Qualified Business Use Recordkeeping, Adequate Records Related person, Related persons. 123easytaxfiling com Reporting on Form 4562, How Is Listed Property Information Reported? Lodging, Property used for lodging. 123easytaxfiling com M Maximum deduction Electric vehicles, Electric Vehicles Passenger automobiles, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Mobile home (see Residential rental property) Modified ACRS (MACRS) Addition or improvement, Additions and Improvements Alternative Depreciation System (ADS), Which Depreciation System (GDS or ADS) Applies? Conventions, Which Convention Applies? Declining balance method, Declining Balance Method Depreciation methods, Which Depreciation Method Applies? Farm property, Depreciation Methods for Farm Property Figuring, short tax year, Property Placed in Service in a Short Tax Year General Depreciation System (GDS), Which Depreciation System (GDS or ADS) Applies? Percentage tables, Using the MACRS Percentage Tables Property classes, Which Property Class Applies Under GDS? Recovery periods, Which Recovery Period Applies? Short tax year, Figuring the Deduction for a Short Tax Year Straight line method, Straight Line Method N Nonresidential real property, Which Property Class Applies Under GDS? Nontaxable transfer of MACRS property, Property Acquired in a Nontaxable Transfer O Office in the home, Office in the home. 123easytaxfiling com , Office in the home. 123easytaxfiling com Ownership, incidents of, Incidents of ownership. 123easytaxfiling com P Partial business use, Partial business use. 123easytaxfiling com Passenger automobile Defined, Passenger Automobiles Electric vehicles, Electric Vehicles Limit on, Do the Passenger Automobile Limits Apply? Maximum depreciation deduction, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Patent, Patents and copyrights. 123easytaxfiling com (see also Section 197 intangibles) Personal property, Personal property. 123easytaxfiling com Phonographic equipment (see Listed property) Photographic equipment (see Listed property) Placed in service Before 1987, Property You Placed in Service Before 1987 Date, What Is the Placed in Service Date? Rule, Placed in Service Property Classes, Which Property Class Applies Under GDS? Depreciable, What Property Can Be Depreciated? Idle, Idle Property Improvements, How Do You Treat Repairs and Improvements? Leased, Leased property. 123easytaxfiling com , Leased property. 123easytaxfiling com Listed, What Is Listed Property? Personal, Personal property. 123easytaxfiling com Real, Real property. 123easytaxfiling com Retired from service, Retired From Service Tangible personal, Tangible personal property. 123easytaxfiling com Term interest, Certain term interests in property. 123easytaxfiling com Q Qualified leasehold improvement property, defined, Qualified leasehold improvement property. 123easytaxfiling com , Qualified leasehold improvement property. 123easytaxfiling com Qualified property, special depreciation allowance, What Is Qualified Property? R Real property, Real property. 123easytaxfiling com Recapture Clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. 123easytaxfiling com General asset account, abusive transaction, Abusive transactions. 123easytaxfiling com Listed property, Recapture of Excess Depreciation MACRS depreciation, Revoking an election. 123easytaxfiling com Section 179 deduction, When Must You Recapture the Deduction? Special depreciation allowance, When Must You Recapture an Allowance? Recordkeeping Listed property, Adequate Records Section 179, How Do You Elect the Deduction? Recovery periods ADS, Recovery Periods Under ADS GDS, Recovery Periods Under GDS Related persons, Related persons. 123easytaxfiling com , Related persons. 123easytaxfiling com , Related persons. 123easytaxfiling com , Related persons. 123easytaxfiling com , Related person. 123easytaxfiling com , Related persons. 123easytaxfiling com Rent-to-own property, defined, Qualified rent-to-own property. 123easytaxfiling com Rental home (see Residential rental property) Rented property, improvements, Improvements to rented property. 123easytaxfiling com Repairs, How Do You Treat Repairs and Improvements? Residential rental property, Which Property Class Applies Under GDS? Retail motor fuels outlet, Retail motor fuels outlet. 123easytaxfiling com Revoking ADS election, Electing ADS. 123easytaxfiling com General asset account election, Revoking an election. 123easytaxfiling com Section 179 election, Revoking an election. 123easytaxfiling com S Sale of property, Sale or Other Disposition Before the Recovery Period Ends Section 179 deduction Business use required, Partial business use. 123easytaxfiling com Carryover, Carryover of disallowed deduction. 123easytaxfiling com Dispositions, When Must You Recapture the Deduction? Electing, How Do You Elect the Deduction? Limits Business (taxable) income, Business Income Limit Business-use, recapture, When Must You Recapture the Deduction? Dollar, Dollar Limits Enterprise zone business, Enterprise Zone Businesses Partial business use, Partial business use. 123easytaxfiling com Married filing separate returns, Married Individuals Partnership rules, Partnerships and Partners Property Eligible, Eligible Property Excepted, Excepted Property Purchase required, Property Acquired by Purchase Recapture, When Must You Recapture the Deduction? Recordkeeping, How Do You Elect the Deduction? S corporation rules, S Corporations Settlement fees, Settlement costs. 123easytaxfiling com Short tax year Figuring depreciation, Property Placed in Service in a Short Tax Year Figuring placed-in-service date, Using the Applicable Convention in a Short Tax Year Software, computer, Computer software. 123easytaxfiling com , Off-the-shelf computer software. 123easytaxfiling com Sound recording, Films, video tapes, and recordings. 123easytaxfiling com Special depreciation allowance Election not to claim, How Can You Elect Not To Claim an Allowance? Qualified property, What Is Qualified Property? Recapture, When Must You Recapture an Allowance? Stock, constructive ownership of, Constructive ownership of stock or partnership interest. 123easytaxfiling com Straight line method, Intangible Property, Straight Line Method Created intangibles, Certain created intangibles. 123easytaxfiling com T Tangible personal property, Tangible personal property. 123easytaxfiling com Term interest, Certain term interests in property. 123easytaxfiling com Trade-in of property, Trade-in of other property. 123easytaxfiling com Trucks, Trucks and Vans U Unadjusted basis, Figuring the Unadjusted Basis of Your Property Useful life, Property Having a Determinable Useful Life V Vans, Trucks and Vans Video tape, Films, video tapes, and recordings. 123easytaxfiling com Video-recording equipment (see Listed property) W When to use ADS, Which Depreciation System (GDS or ADS) Applies? Worksheet Leased listed property, Inclusion amount worksheet. 123easytaxfiling com MACRS, MACRS Worksheet Prev  Up     Home   More Online Publications