"Gross income from sales" includes business income that you receive from sales to your customers. You should only report 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.

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 own a plumbing business and provide plumbing services for a friend of yours who owns a landscaping business. In return, your friend installs some new shrubs in front of your office. The IRS expects you to report the value of the shrubs and installation as income, although you can deduct any of your costs incurred in providing the plumbing services. If the shrubs had been installed in front of your home instead of your office, their value would still be reported as business income. However, if you had received the shrubs in exchange for some personal, non-business service such as babysitting, they should be reported as miscellaneous personal income on Line 21 of your Form 1040.

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 income 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.