 Income tax 2021-2022, figuring gross profit. Get ready to get refunds to the max, dive in into income tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business Tax Year 2021, income tax formula, looking at line one income, which would have a supplemental schedule that in essence being an income statement with income and expenses. Basically being deductions to net then rolling in to line one income, line one here on the tax formula as well as on the first page of the form 1040 we see here where we would have then the schedule see rolling into the schedule one, the schedule one rolling into page one, form 1040, line number eight we see here. This is the schedule see profit or loss from business basically and income statement. So now we're looking at the figuring of the gross profit. And I know what you're thinking, I don't want to figure that, it's gross. But it's not that bad, it's not that gross once you get into it. Note that the gross profit isn't the bottom line, we're not talking about the net income, we're talking about the gross profit basically income less the cost of goods sold we looked into the cost of goods sold calculation in a prior presentation. So after you figure the gross, after you figure the gross receipts from your business, which we looked at in chapter five and the cost of goods sold we looked at in the prior presentation you are ready to figure your gross profit which should be fairly easy at this point because you did the difficult part, you did the income, you did the cost of goods sold if applicable it would only be applicable if you had a company that had inventory either inventory that you're purchasing marking up and selling or manufacturing the inventory if you don't have those items then the figuring of the gross profit is super simple because you don't have any cost of goods sold and it would basically be the same as the income line. So you must determine gross profit before you deduct any business expenses. So gross profit is subtotal along the way to get to the end result of net income important subtotal from an accounting standpoint as well as from a tax standpoint because the relationship between the cost of goods sold and the income should be quite significant is quite significant for companies that primarily make money by selling inventory whether manufactured or whether just bought and marked up so that subtotal along the way to get to net income is important even though the cost to get sold is really just kind of like another kind of expense it's a really important expense so these expenses are discussed in chapter eight so business that sell products figuring your gross profit by first figuring your net receipts so you're going to figure the net receipts that's going to be your basically income line three on the schedule C by subtracting any returns and allowances line two so the receipts your income basically minus the returns and allowances which is kind of like a contra income line it acts like kind of a deduction but it's really like a reduction of income to get to your basically your income line so you're going to subtract out the cost of goods sold so once again on line schedule C subtracting any returns and allowances line two from gross receipts line one returns and allowances include cash or credit refunds you make to customers rebates and other allowances off the actual sales price next subtract the cost of goods sold line four from the net receipts line three the result is the gross profit from your business see it wasn't that gross to do it once you get into the work it's not that gross business that sell that sell services so if what if your service business well then it's even easier because you don't have any inventory therefore no cost of goods sold so 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 the gross profit is the same as the net receipts gross receipts minus any refund rebates or other allowances most professions and businesses that sell services rather than products can figure gross profit directly from the net receipts in this way so it's just an easy calculation no subtraction of the cost of goods sold because there is none because there's no inventory illustration this illustration of growth of the gross profit section of the income statement of a retail business shows how gross profit is figured so we're about to sell to show you an illustration of gross profit it might be a little gross so prepare yourself firm stomach here we go so we've got the income statement you're into December 31st, 2021 we've got the gross receipts minus the returns and allowances gives us the net receipts notice that those returns and allowances is a subtraction you might say that's acting like an expense but it's in the income section because we're kind of like reversing kind of like a sale that happened that happened instead of recording an expense that was something that was consumed to generate the revenue and then we're going to subtract out the cost of goods sold to get to that gross profit there it is there's the gross one there's the gross so then we have the inventory at the beginning of the year so this is our cost of goods sold calculation $37,845 plus the purchases this is what we are purchasing of basically inventory and then we're going to subtract out items withdrawn for personal use we're going to take some of that inventory and consume it ourselves that gives us the $283,250 for the purchases in essence then we got the cost of goods sold cost of goods I'm sorry goods available for sale cost of goods available for sale I typically call it and that will give us the $321,935 minus the Indian inventory which you would find on the balance sheet in essence and that would then give us the cost of goods that we sold $288,140 notice that this $288,140 basically page 2 of the schedule C should tie into then the cost of goods sold basically on page 1 of the schedule C of the schedule C I hope I said schedule C both times here of the schedule C now if you're using accounting software you might just have this already made for you because they used a perpetual accounting system and you would have to then possibly the cost of goods sold calculation because you might have the beginning inventory from the prior year you might then have the cost of goods sold because it came from your accounting software and then what you would then be backing and you might have the ending inventory from the accounting software on the balance sheet what you would be backing into then is going to be the goods available this calculator I'm sorry the purchases this would be X these aren't X's I'm just pointing those out those were done and then this would be X if you were to do like a you know algebra if you were to do algebra on it so items to check consider the following items before figuring your gross profit gross receipts at the end of each business day make sure your records balance with your actual cash and credit receipts for the day you may find it helpful to use cash registers to keep track of receipts you should also use a proper invoicing system and keep a separate bank account for your business so separating the business and personal we're getting into the bookkeeping side of things the bookkeeping practicing of stuff that's always the good idea to make your tax stuff a lot easier sales tax collection so check to make sure your records show the correct sales tax collected if you collect state and local sales tax imposed on you as the seller of goods or services from the buyer you must include the amount collected in gross receipts if you are required to collect state and local taxes imposed on the buyer and turn them over to state or local government you generally do not include these amounts in income and the reason for that is basically you you collect the sales tax when you're selling something and that's kind of imposed on the idea is that it's imposed on the client so that means that when you're collecting it it's being used as the tax collector in a similar way as if you're an employer and you have to withhold from your employee the payroll taxes you're basically just acting as the tax collector so if it's a sales tax you're charging the customer the tax and you're basically acting as the tax collector so that part of the revenue typically you would want to put on the books as a liability as opposed to as revenue and then when you pay it to the to the government it's going to be an expense because it never hit the income statement so in any case inventory at the beginning of the year compare this figure with last year's ending inventory the two amounts should usually be the same so that gets into our inventory calculation again which we saw in the cost of good sold calculation purchases if you take any inventory items for personal use use them use them yourself provide them to your family or give them be sure to remove them from the cost of good sold so we saw that in a prior presentation your details on how to adjust cost of good sold see the merchandise withdrawal from sale chapter 6 so inventory at the end of the year so check to make sure your procedures for taking inventory are adequate so at the end of the year you might have a perpetual inventory system you might have a periodic inventory system you want to make sure that you're counting your inventory either way at the end of the year to make sure that you're reporting it just from an accounting standpoint properly at that point in time so this procedure should ensure all items have been included in inventory and proper pricing techniques have been used use inventory forms and adding machine tapes as the only evidence for your inventory inventory forms are available at office supply stores these forms have columns for recording the description quantity unit price and value of each inventory each page has space to record who made the physical count who priced the items who made the extensions and who proof read the calculations you might have software that can help you with this as well remember you do want to do a physical count even if you have a perpetual inventory system so that you can properly value the inventory at that point these forms will help satisfy you that the total inventory is accurate they will also provide you with a permanent record of your inventory support its validity