How to Figure Out My Income From My Sole Proprietorship

By John Cromwell

A sole proprietorship is a business that is an extension of its owner. As a sole proprietor, you are personally responsible for all your business's liabilities and debts. You must pay taxes on all its income. While you must report your business's income on your 1040, you tally the profits and losses of your sole proprietorship on Schedule C of the1040; you calculate the business's gross income in Part I.

Step 1

Gather your records of your gross receipts. As a sole proprietor, you should keep financial records regarding your business activities. These records should include every sale you make, when you make it, and how much income you receive from the sale. To determine your sole proprietorship's income, you'll want to keep the business's sales activities separate from other forms of income you may have.

Step 2

Keep all receipts for the raw materials and labor you use to create your product. Your business records should also indicate all purchases you make in relation to the business. These records should include what you purchase, when you purchase it, and the cost of all purchases.

Ready to start your LLC? Start an LLC Online Now

Step 3

Add up the sales revenue from your gross receipts. You only want the income you earned for the tax year. Generally, the tax year begins on January 1 and ends on December 31.

Step 4

Subtract the value of all returns you had during the year and any allowance for returns from your sales revenue. The returns allowance is your estimated value of future returns on already sold product.

Step 5

Subtract the cost of goods sold from your sales revenue. You calculate the cost of goods sold using your inventory amounts. Determine what the value of your inventory was at the beginning of the year. Add the value of all the materials and labor that went directly into creating the product. If you had a secretary who did not participate in creating the product, do not include her wages. Once you subtract the value of the inventory as of the end of the year what remains is your gross profit.

Step 6

Calculate any other business income. Additional income can include any prizes or awards your business received, as well as profits you made from selling scraps.

Step 7

Add your gross profit and other business income to determine your gross income -- which is not your taxable income. To determine your taxable income, you must subtract other permissible, deductible expenses, as well as other deductions, which you also calculate on Schedule C.

Ready to start your LLC? Start an LLC Online Now
Are Nonprofit Raffle Ticket Donations Tax Deductible?
 

References

Resources

Related articles

What Can an LLC Deduct?

The only time a limited liability company is responsible for remitting federal income tax payments is if the members elect to treat it as a corporation for tax purposes. If the LLC members do not elect corporate tax treatment, each member is responsible for reporting a portion of the LLC's income and deductions. Regardless of how you classify the LLC for tax purposes, the business is eligible to deduct a wide range of business expenses.

The Advantages of Sole Proprietorship Taxation

A sole proprietorship is one of the less formal ways of running your business. You generally don't have any forms to fill out, and you operate under your own name. Your business doesn't have a separate legal existence from you as a person, meaning that your income and expenses appear on your income tax return, which has several advantages.

What Can Be Deducted in an S-Corp?

An S corp is a corporation that has elected to be treated as a partnership for tax purposes. This means that the company does not pay income tax; instead, income and deductions flow through to the personal income tax return of each owner. Both an S corp and a C corp have the same deductible expenses; the only difference is who pays the tax.

LLCs, Corporations, Patents, Attorney Help

Related articles

Sole Proprietorship & Capital Gains

Sole proprietorships are businesses owned by one person. Instead of reporting the income, gains and losses on a ...

Net Operating Loss for a Sole Proprietorship

It isn’t uncommon for sole proprietors to report losses in some years, which are the result of incurring business ...

Simple Balance Sheet Preparation for an S Corp

An S corporation is an entity that can be taxed as a normal corporation but is permitted by the IRS to be taxed like a ...

Sole Proprietorship Business Deductions

Despite the fact that a sole proprietorship isn’t treated as being a separate and distinct entity from its owner, the ...

Browse by category
Ready to Begin? GET STARTED