You may have an understanding of gross income as it pertains to an individual, but gross income for a company is a little different.
When you calculate your individual gross income, you’re finding your total pay before taxes or deductions. When you calculate your company’s gross income you’re looking at the total revenue your company has made minus the cost of the goods you sold (COGS). Cost of goods sold entails everything required to build or make your product, but does not include costs related to taxes or the administration of your business. Also known as gross profit, your gross income is one the best ways to measure the financial performance of your company.
Calculating Gross Income
The equation for gross income is quite simple:
Gross Income = Gross Revenue – Cost of Goods Sold (COGS)
Your gross revenue is found by adding up your gross receipts or sales, then subtracting your returns and allowances. Once you have your gross revenue, you need to figure out your cost of goods sold. Your cost of goods sold is calculated by adding the cost of your labor, materials, supplies, and other related purchases. Once you have these two figures, you can subtract your cost of goods sold from your gross revenue to get your gross income.
Say you’re a furniture builder and you make $300,000 over the course of a year. If you spent around $100,000 on parts and materials to make your furniture, then your gross income would be $200,000.
Reporting Gross Income
You will need to report your gross income on your businesses’ income tax forms. If you’re a sole proprietorship or a single-member LLC, you’ll report your gross income by filing Schedule C. If your business operates as a partnership or multi-member LLC, you’ll file Form 1065 and report your gross income using that form. Lastly for corporations, you’ll use Form 1120-S (S Corp) or Form 1120.
Why Gross Income Matters
Your company’s gross income is the most straightforward way to measure your profitability, and is necessary to report on your tax return. Also, by measuring how much your cost of goods sold is taking away from your overall sales, you can better understand if you’ve launched a promising business or if you’re spending too much to create your products. In business, your gross income is a good figure to start with before you calculate your net income or your taxes.