The starting point for computing your income tax is, of course, your gross business receipts or sales. From this you will subtract your cost of goods sold (if any) to arrive at your gross profit. In this section we'll discuss some rules you need to know about exactly what is and isn't reportable business income, and the distinctions between various types of income that must be reported in different places on your tax forms.

The general rule is that any income you receive that's connected with your business is considered "business income" that should be reported on your business tax return. For sole proprietors, that means on Schedule C or C-EZ. Income is considered "connected with your business" if it's clear that the payment would not have been made if you did not have the business.

• Gross income from sales is the gross income you receive from sales of your product or service to customers. In most cases, this will be the bulk of the income you receive from actually operating your business. On Schedule C, it's reported on Line 1.
• Miscellaneous business income refers to miscellaneous types of income that are not sales revenue. On Schedule C, it is reported on Line 6. This area is where questions arise and the answers can sometimes get complicated, since some types of income that might be considered business-related must be reported on other areas of your tax return.
• Cost of goods sold must be computed if your business uses inventory, in order to complete the business income portion of your tax return.