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For households and individuals, gross income is the sum of all
wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profi ...

wages
,
salaries A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wage A wage is the distribution from an employer Employment is a relationship between two parties ...
, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
, defined as the gross income minus taxes and other deductions (e.g., mandatory
pension A pension (, from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be ...

pension
contributions). For a firm, gross income (also gross profit, sales profit, or credit sales) is the difference between
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
and the cost of making a product or providing a service, before deducting overheads,
payroll A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks per ...
,
taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
, and
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
payments. This is different from
operating profit In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compar ...
(earnings before interest and taxes).
Gross margin Gross margin is the difference between revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes ...
is often used interchangeably with gross profit, but the terms are different. When speaking about a monetary amount, it is technically correct to use the term gross profit; when referring to a percentage or ratio, it is correct to use gross margin. In other words, gross margin is a percentage value, while gross profit is a monetary value.


Relationship with other accounting terms

The various deductions (and their corresponding metrics) leading from
net sales In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sales'' or ''Net ...
to
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
are as follows: :
Net sales Net or net may refer to: Mathematics and physics * Net (mathematics) In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers ( and ), formulas and related structures (), shapes and spaces in which they ...
=
gross sales In bookkeeping, accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which h ...
– (customer discounts + returns + allowances) :Gross profit =
net sales In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sales'' or ''Net ...
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
:
Gross margin Gross margin is the difference between revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes ...
= [(
net sales In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sales'' or ''Net ...
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
)/
net sales In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sales'' or ''Net ...
] × 100%. :Operating profit = gross profit – total operating expenses :
Net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
(or net profit) = operating profit – taxes – interest (Note:
Cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
is calculated differently for a
merchandising Merchandising is any practice which contributes to the sale of products Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or se ...

merchandising
business than for a
manufacturer Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector ...
.)


United States

In United States income tax law, gross income serves as the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or non-resident. Under the U.S.
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large The ''United States Sta ...

Internal Revenue Code
, "Except as otherwise provided" by law, gross income means "all income from whatever source derived," and is not limited to cash received. Federal tax regulations interpret this general rule. The amount of income recognized is generally the value received or the value which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income for tax purposes. The time at which gross income becomes taxable is determined under Federal tax rules, which differ in some cases from financial accounting rules.


What is income

Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries ("taxpayers") are subject to
income tax in the United States Income taxes in the United States are imposed by the Federal government of the United States, federal government, and most State governments in the United States, states. The income taxes are determined by applying a tax rate, which Progressive t ...
. The amount on which tax is computed,
taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...
, equals gros
income
less allowable
tax deductions Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural p ...
. The Internal Revenue Code gives specific examples. The examples are not all inclusive. The term "income" is not defined in the statute or regulations. An early
Supreme Court A supreme court is the highest court A court is any person or institution, often as a government institution, with the authority to Adjudication, adjudicate legal disputes between Party (law), parties and carry out the administration of just ...

Supreme Court
case stated, "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets." The Court also held that the amount of gross income on disposition of property is the proceeds less the basis (usually, the acquisition cost) of the property. Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services." Following are some of the things that are included in income: *Wages, fees for services, tips, and similar income. It is well established that income from personal services must be included in the gross income of the person who performs the services. Mere assignment of the income does not shift the liability for the tax. *
Interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

Interest
received, as well as imputed interest on below market and gift loans. *
Dividends A dividend is a distribution of profits by a corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law 'b ...
, including capital gain distributions, from corporations. *Gross profit from sale of
inventory Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
. The sales price, net of discounts, less
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
is included in income. *Gains on disposition of other property. Gain is measured as the excess of proceeds over the taxpayer's
adjusted basisIn tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items. Adjusted Basis or Adjusted Tax Basis refers to the original cost or other basis of property Property (''latin: Res Privata'') in the Abs ...
in the property. Losses from property may be allowed as
tax deductions Tax deduction is a reduction of income that is able to be tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural p ...
. *Rents and
royalties A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset o ...

royalties
from use of tangible or intangible property. The full amount of rent or royalty is included in income, and expenses incurred to produce this income may be allowed as tax deductions. *
Alimony Alimony (also called aliment Aliment, in Scots law and in other civil systems, is the sum of money paid, or allowance given in respect of the reciprocal Obligation (law), obligation of parents and children, husband and wife, grandparents and g ...

Alimony
and separate maintenance payments. *
Pensions A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the ...
, annuities, and income from life insurance or endowment contracts. *Distributive share of
partnership A partnership is an arrangement where parties, known as business partner A business partner is a commercial entity with which another commercial entity has some form of Business alliance, alliance. This relationship may be a contractual, exclus ...

partnership
income or pro rata share of income of an
S corporation An S corporation, for United States federal income tax, is a closely held corporation (or, in some cases, a limited liability company A limited liability company (LLC) is the United States of America, US-specific form of a private limited ...
. *State and local income tax refunds, to the extent previously deducted. Note that these are generally excluded from gross income for state and local income tax purposes. *Any other income from whatever source. Even income from
crime In ordinary language, a crime is an unlawful act punishable by a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper ...

crime
s is taxable and ''must'' be reported, as failure to do so is a crime in itself. Gifts and inheritances are not considered income to the recipient under U.S. law. However, gift or estate tax may be imposed on the donor or the estate of the decedent.


Year of inclusion

A taxpayer must include Income as part of taxable income in the year recognized under the taxpayer's method of accounting. Generally, a taxpayer using the cash method of accounting (cash basis taxpayer) recognizes income when received. A taxpayer using the accrual method (accrual basis taxpayer) recognizes income when earned. Income is generally considered earned: *on sales of property when title to the property passes to the customer, and *on performance of services when the services are performed


Amount of Income

For a cash method taxpayer, the measure of income is generally the amount of money or fair market value of property received. For an accrual method taxpayer, it includes the amount the taxpayer has a right to receive. Certain specific rules apply, including: *Constructive receipt, *Deferral of income from advance payment for goods or services (with exceptions), *Determination what portion of an annuity is income and what portion is return of capital, The value of goods or services received is included in income in
barter In trade, barter (derived from ''baretor'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods or ...

barter
transactions.


Exclusions from gross income: U.S. Federal income tax law

The courts have given very broad meaning to the phrase "all income from whatever source derived," interpreting it to include all income unless a specific exclusion applies. Certain types of income are specifically excluded from gross income. These may be referred to as exempt income, exclusions, or
tax exemption Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, reduc ...
s. Among the more common excluded items are the following: *Tax exempt interest. For Federal income tax, interest on state and municipal bonds is excluded from gross income. Some states provide an exemption from state income tax for certain bond interest. *Some Social Security benefits. The amount exempt has varied by year. The exemption is phased out for individuals with gross income above certain amounts. *Gifts and inheritances. However, a "gift" from an employer to an employee is considered compensation, and is generally included in gross income. *Life insurance proceeds received by reason of the death of the insured person. *Certain compensation for personal physical injury or physical sickness, including: **Amounts received under worker’s compensation acts for personal physical injuries or physical sickness, **Amounts received as damages (other than punitive damages) in a suit or settlement for personal physical injuries or physical sickness, **Amounts received through insurance for personal physical injuries or physical sickness, and **Amounts received as a pension, annuity, or similar allowance for personal physical injuries or physical sickness resulting from active service in the armed forces. *Scholarships. Amounts in the nature of compensation, such as for teaching, are included in gross income. *Certain employee benefits. Non-taxable benefits include group
health insurance Health insurance or medical insurance (also known as medical aid in South Africa) is a type of insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, ev ...
, group
life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations The Commonwealth of Nations, generally known simply as the Commonwealth, is a political association of 54 member states, almost all of which are former territorial ...
for policies up to $50,000, and certain fringe benefits, including those under a flexible spending or
cafeteria plan A cafeteria plan is a type of employee benefit Employment is a relationship between two parties, usually based on contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties o ...
. *Certain elective deferrals of salary (contributions to "401(k)" plans). *Meals and lodging provided to employees on employer premises for the convenience of the employer. *Foreign earned income exclusion for U.S. citizens or residents for income earned outside the U.S. when the individual met qualifying tests. *Income from discharge of indebtedness for insolvent taxpayers or in certain other cases. *Contributions to capital received by a corporation. *Gain up to $250,000 ($500,000 on a married joint tax return) on the sale of a personal residence. There are numerous other specific exclusions. Restrictions and specific definitions apply. Some state rules provide for different inclusions and exclusions.


Source of income

United States persons (including citizens, residents (whether U.S. citizens or aliens residing in the United States), and U.S. corporations) are generally subject to U.S. federal income tax on their worldwide income. Nonresident aliens are subject to U.S. federal income tax only on income from a U.S. business and certain income from United States sources. Source of income is determined based on the type of income. The source of compensation income is the place where the services giving rise to the income were performed. The source of certain income, such as dividends and interest, is based on location of the residence of the payor. The source of income from property is based on the location where the property is used. Significant additional rules apply.


Taxation of nonresident aliens

Nonresident aliens are subject to regular income tax on income from a U.S. business or for services performed in the United States. Nonresident aliens are subject to a flat rate of U.S. income tax on certain enumerated types of U.S. source income, generally collected as a
withholding tax Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, or a ''Prélèvement à la source'', is income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by t ...
. The rate of tax is 30% of the gross income, unless reduced by a
tax treaty Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case ...
. Nonresident aliens are subject to U.S. federal income tax on some, but not all capital gains.See generally subsection (a), paragraph (2) of 26 USC 871. Wages may be treated as effectively connected income, or may be subject to the flat 30% tax, depending on the facts and circumstances.


See also

*
Adjusted gross income In the United States income tax system, adjusted gross income (AGI) is an individual's total gross income For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is th ...
* Effective gross income *
Gross profit For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where wo ...
*
Gross margin Gross margin is the difference between revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes ...
*
Net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
*
Amount Realized Amount realized, in US federal income tax law, is defined by section 1001(b) of Internal Revenue Service, Internal Revenue Internal Revenue Code, Code. It is one of two variables in the formula used to compute gains and losses to determine gross inc ...
*
Cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
(CS) *
Earnings before interest, taxes, depreciation and amortization A company A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self ...
(EBITDA) *
Profit margin Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability An economic profit is the difference between the revenue a commerce , commercial entity has received from its outputs and the opportunity costs of its ...
(the ratio of net income to net sales) * Selling, general and administrative expenses (SG&A) *
Income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...


References


Further reading

Standard US tax texts: *Willis, Eugene, Hoffman, William H. Jr., ''et al.'', ''South-Western Federal Taxation'', published annually. 2009 edition (cited above as Willis, Hoffman 2009) included (student) and (instructor). *Pratt, James W., Kulsrud, William N., ''et al.'', ''Federal Taxation", updated periodically. 2010 edition (cited above as Pratt & Kulsrud). US IRS materials:
Publication 17
''Your Federal Income Tax'' Scholarly Writing: * {{accounting nav Taxation in the United States Income taxation Tax terms Corporate finance Management accounting Profit ar:هامش الربح