Revenues
Revenues is any income your business earns. In general, any revenue is taxable unless IRS rules specifically exclude it.
Your gross revenue includes all income received from sales, after you subtract things like returns and discounts. Then add any other income such as interest earned from bank accounts, other investment returns, and profits from the sale of assets.
To illustrate, say Stark Industries had gross sales of $500,000, allowed returns and discounts totaling $10,000. Stark Industries’ gross revenues would come to $490,000 ($500,000 – $10,000).
Business deductions
A business generally has two types of deductions that can be used to reduce its taxable income.
- Cost of goods sold. A company’s cost of goods sold (COGS) is the total costs used to create its products or services. If you sell wool socks, COGS includes things like the wool and the wages of the sewers.
- Operating expenses. A business’s operating expenses are the costs it incurs to run the company outside of COGS. Examples include advertising, bank fees, interest, legal and accounting fees, insurance, office supplies, property taxes, rent, and utilities.
Earlier, we calculated Stark Industries gross revenue to be $490,000. Let’s say they had costs of goods sold totaling $100,000 and operating expenses of $200,000. The company’s taxable income would be $190,000 ($490,000 gross revenue – $100,000 cost of goods sold – $200,000 operating expenses).
Personal deductions
There are also deductions you can claim to reduce your personal taxable income. These include:
- Itemized deductions or the standard deduction. Taxpayers can claim either itemized deductions (such as medical expenses, state and local taxes like property taxes, home mortgage interest and donations to charity) or the standard deduction (a predetermined amount based on your filing status).
- Pass-through deduction. Owners of pass-through businesses (sole proprietorships, partnerships, limited liability companies, and S corporations) may be able to take advantage of the new pass-through deduction. This deduction allows the business owner to deduct up to 20% of the business income on their Form 1040.
How to reduce your taxable income
Turning a healthy profit from your business can sometimes feel like a double-edged sword: making money is great, but the resulting tax bill isn’t. Here are a few tax-saving strategies to consider.
Save for retirement
Contributing to a tax-advantaged retirement account, such as an IRA, 401(k), or SEP-IRA can reduce your taxable income for the year.
For example, if you are self-employed, you can set up a SEP-IRA and contribute up to 25% of your earnings, up to a maximum of $61,000 for 2022 or $66,000 for 2023.
Purchase assets
Typically, business equipment is depreciated by writing off the cost of the asset over several years. However, under certain conditions, IRS rules allow business owners to write off the entire cost of the asset in one year by taking advantage of bonus depreciation or Section 179 deductions.
Accelerate expenses and defer income
A cash-basis taxpayer can lower taxable income by strategically timing income and expenses. At year-end, look ahead to bills that are due in January and beyond. Consider paying them by check or credit card before year-end so you can claim the deduction on this year’s return.
To defer income, wait until the end of the year to send invoices. You won’t have to claim the income on your tax return until you receive the cash or checks early in the next calendar year.
A caution on buying stuff to lower your taxes
Whether you’re purchasing assets or accelerating expenses, keep in mind you never want to spend money on things you don’t need just to save on your tax bill. That’s not smart tax planning. Only invest in your business or accelerate specific purchases you’re already planning to make.
Now that you’ve got a handle on calculating your taxable income, you can estimate your small business tax liability.
FAQs
Your Adjusted Gross Income (AGI) is then calculated by subtracting the adjustments from your total income. Your AGI is the next step in figuring out your taxable income. You then subtract certain deductions from your AGI. The resulting amount is taxable income on which your taxes are calculated.
How do I figure out my taxable income? ›
To calculate taxable income, you begin by making certain adjustments from gross income to arrive at adjusted gross income (AGI). Once you have calculated adjusted gross income, you can subtract any deductions for which you qualify (either itemized or standard) to arrive at taxable income.
What is considered taxable income? ›
Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income.
What is the difference between total income and taxable income? ›
Gross income includes all income you receive that isn't explicitly exempt from taxation under the Internal Revenue Code (IRC). Taxable income is the portion of your gross income that's actually subject to taxation. Allowable deductions are subtracted from gross income to arrive at your taxable income.
Is taxable income the same as net income? ›
Key Takeaways
Taxable income is your AGI minus your standard deduction (or itemized deductions from Schedule A) and your qualified business income deduction from Form 8995 or Form 8995-A. Net income typically means the amount of income left over after you pay your income tax or get a tax refund.
What is the taxable income amount? ›
Taxable income is your gross income, less any allowable deductions. When you update your income estimate you need to include all the income you and/or your partner expect to receive for the full financial year including: salary and wages.
What is my taxable income on W2? ›
Box 1: Wages, Tips, Other Compensation.
The amount in Box 1 will generally be the “YTD Gross” under the Summary section of your final earnings statement, minus any pre-tax deductions such as health/dental/vision insurance, flexible spending accounts and retirement and tax deferred savings plans, etc.
Is social security considered taxable income? ›
You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
Is income taxable in the year it is earned or when it is paid? ›
Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay the expenses. Under the accrual method, you generally report income in the tax year you earn it, regardless of when payment is received.
Which explains a difference between income and taxable income? ›
Which explains a difference between income and taxable income? Income is what a person earns, while taxable income reflects deductions subtracted for relevant expenses.
2024 Federal Tax Brackets
| Rate | Single | Married Filing Jointly |
|---|
| 10% | $0 – $11,600 | $0 – $23,200 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 |
3 more rowsMay 16, 2024
Your ATI is the sum of the following amounts:
- taxable income (excluding any assessable First home super saver released amount)
- adjusted fringe benefits total, which is the sum of. ...
- reportable employer superannuation contributions.
- deductible personal superannuation contributions.
For individual filers, calculating federal taxable income starts by taking all income minus “above the line” deductions and exemptions, like certain retirement plan contributions, higher education expenses, student loan interest, and alimony payments, among others.
What type of income is not taxable? ›
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.
What is defined as taxable income? ›
Taxable income is a term you've likely heard during tax season. Like it suggests, taxable income is the amount of a person's or company's income—minus exemptions and deductions—that can be taxed. Among the types of taxable income are a person's salary or wages, tips, benefits and investment income.
How do I find my income on my taxes? ›
Where do you find your AGI on your tax return?
- Line 11 on Form 1040, 1040-SR and 1040-NR (2020 through 2023 tax years)
- Line 8b on Form 1040 and 1040-SR (2019 tax year)
- Line 7 on Form 1040 (2018 tax year)
- Line 21 on Form 1040A (tax years before 2018)
- Line 4 on Form 1040EZ (tax years before 2018)
Federal Withholding Taxable Wages are calculated by adding all earnings (including any taxable fringe benefits) less all pre-tax deductions, and less any applicable 1042-S Wages. The tax rate(s) used in the calculation are specific to earnings being paid.
Is taxable income the same as adjusted gross income? ›
Taxable income – Taxable income is arrived at by subtracting the standard or itemized deductions—whichever amount is greater—from your AGI.
How to calculate tax from total amount? ›
Calculating the sales tax applied to a purchase is a matter of simply multiplying the tax rate by the purchase price using the equation sales tax = purchase price x sales tax rate. Adding the sales tax to the original purchase price gives the total price paid with tax.
