Taxable Gross Income Defined (Part 3)

Business Income or Loss, as reported on Schedule C or C-EZ (Self Employment)
The basic formula is Profit/Loss = Business Income minus Business Expenses
Gross Income – earned money for services rendered/products sold
Expenses – incurred and paid during the normal business operations such as cost of goods sold, salaries and commissions paid to others, state and local business taxes paid, office supplies, actual automobile expenses (standard mileage rate is 55.5 cents a mile)
Others

  • Business meal and entertainment expenses at 50%
  • Depreciation of business assets
  • Interest expense on business loans
  • Employee benefits
  • Legal and professional services
  • Bad debts actually written off for accrual basis taxpayer only (Only direct write off method is allowed, not the allowance method)
  • Nondeductible expenses
    • Salaries paid to the sole proprietor
    • Federal income tax
    • Personal portion of
      • Automobile and travel expenses
      • Personal meals, entertainment expenses (100% of country club dues are non deductible)
  • Net Taxable Loss – a business with a loss may deduct the loss against other sources of income. When the loss exceeds these income amounts, the spill over loss can carry over to 2 years backward or 20 years carryforward
  • Uniform capitalization rules dictate that certain costs such as direct materials, direct labor, factory overhead. Capitalization of costs generally cause an increase in the carrying costs of ending inventory (until sold, they’re considered assets) and a decrease in ending inventory. This causes an increase in taxable income.
    • Period costs are not required to be capitalized such as general selling and administrative expenses and R&D expenses

There are two taxes on net taxable income

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