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"Gross income from sales" includes business income that you receive from sales to your customers. You should report only income you received within your tax year according to your established accounting method.
For sole proprietors, income you receive from sales to your customers is reported on Line 1 of Schedule C or C-EZ. If you work as an independent contractor and you have received one or more 1099-MISC forms from people or businesses you have done work for, the total amount you've received from all such sources is reported on Line 1(b).
Beginning with the 2011 Schedule C, there are separate lines to report income received via merchant card or other third-party payments separately from other gross receipts, which includes both case and non-cash receipts.
Receipts from merchant card and other third-party payments will be reported separately on Line 1a. All other receipts from your business will be reported on Line 1b. If you are a statutory employee, you will report your income on Line 1c.
Although the line has been added to the form, for 2011, you are not required to allocate your receipts between merchant card payments and other receipts. For 2011, you are to enter -0- on Line 1a and all receipts are to be reported on Line 1b.
Beginning in 2012, make sure you have a system in place that will allow you to accurately allocate your receipts between merchant card/third-party payments and other receipts. The IRS is implementing a matching program that will require third-party payers to provide the IRS with information when the total amount to a payee exceeds $20,000 and the total number of transactions is more than 200. You want to take steps to ensure that you donít get your return flagged due to a mismatch between the amount you report and the credit card companies report.
For most people, the income has been received in the form of cash, checks, or credit card charges, but if you receive income in the form of goods or services in some type of bartering transaction, you must report the fair market value of whatever you receive. You may also have to report the transaction on Form 1099-B, Proceeds from Broker or Barter Transactions.
If you receive a negotiable promissory note in payment for a sale and you use the cash method of accounting, the fair market value of the note is reported in gross income at the time you receive it. Accrual method taxpayers would generally recognize the discounted value of the note at the time of economic performance; e.g., when they had provided the services or goods to the customer.
Computing your gross profit. Once you know your gross revenue from sales (which is reported on Line 1 of Schedule C, for sole proprietors), you must make a number of adjustments before arriving at your "gross business income."
If, during the year, you booked some income but then accepted some returned merchandise or made an allowance to a customer for unsatisfactory products or services, you must enter the total of these amounts as "returns and allowances" on your tax form, and subtract them from your gross sales receipts to arrive at your net receipts.
"Returns and allowances" can include things like rebates, cash refunds, or merchandise credits. Almost any kind of business can have returns and allowances, including professional service businesses.
If you have no inventory, your net receipts will be the same as your gross profits, and you can proceed to determine your deductible business expenses.
If your business uses inventory, however, you'll need to go through a few more steps to complete the business income portion of your tax return. You need to compute your cost of goods sold, which means determining your change in inventory for the year.