At the end of the business year, totaling up your company's gross receipts is anything but gross – hopefully, you'll feel that warm swell of satisfaction as you get a peek at that sweet, sweet total revenue. In some ways, it's the number that proves your hard work has paid off.
Of course, gross receipts are more than just a number, especially where your accountant and the Internal Revenue Service are concerned. Taking a deep dive into gross receipts reveals a few twists you should know about this tax-season jargon.
Gross Receipts: Basic Definition
The most basic definition of gross receipts is your total revenue – emphasis on "total," meaning the figure should include not only sales but also things like rents and interest – before you deduct your expenses. Ask the IRS to define gross receipts, and they'll say that "Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses." Easy enough.
Keep in mind, though, that while gross receipts reflect your revenue before subtracting expenses, the figure is commonly arrived at after deducting revenue from withholding taxes collected from employees or the sale of fixed assets. So your total receipts formula would be total revenue minus fixed asset sales and withholding taxes. Typically, your revenue after deducting expenses is called your net revenue.
Gross Receipts: Digging Deeper
Gross receipts for any taxable year must include monetary amounts received from selling or leasing property over the course of your business operations as well as any income garnered from providing services, plus dividends, interest and commission transactions. That sounds like a pretty wide net, but some things don't count toward gross receipts, such as the proceeds of a loan repayment or engaging in the exchange of stock for property.
When it comes to rental properties, the definition of gross receipts changes just a little bit. For landlords, gross receipts are the total of all monies you receive from tenants paying for space, plus payments for utilities and other services you provide. So it's just the gross amount of money you receive from your tenants without subtracting any of the expenses you pay as a landlord. However, this gross amount may include more than just regular monthly rent payments. It extends to other payments received, like rent paid in advance, payments from a rent-to-own contract, rent penalties, late fees you charged your tenants or security deposits you received – all of these types of payments are defined by the IRS as rent paid.
Gross Receipts Tax
Nowadays, it's hard to have a conversation about gross receipts without talking about the gross receipts tax. Historically, small business income and receipts tax didn't even live in the same world, as state governments raised more money by focusing on the taxation of corporate income. According to the Organization for Economic Co-operation and Development, though, the average corporate income tax rate across the 36 countries in its network dropped from 32.5 percent in the year 2000 to just 23.9 percent in 2018. As a result, some U.S. states have once again turned to the gross receipts tax, also known as the turnover tax, to generate the tax revenue they now lack on the corporate side.
Gross receipts taxation is the practice of taxing all business sales, either without allowing deductions or only allowing for a few deductions. While retail sales taxes charge tax on final sales to customers, gross receipts taxes tax just about every business transaction you can think of, including the purchase of raw materials and equipment and business-to-business purchases, covering all stages of production. As of 2018, Delaware, Nevada, Ohio and Texas all enforce the gross receipts tax, though the resurgent trend may grow as corporate tax rates continue to plummet.
- Business Dictionary: Gross Receipts
- IRS: Gross Receipts Defined
- Cornell Law School: 26 CFR 1.993-6 – Definition of Gross Receipts
- Tax Foundation: Gross Receipts and Margin Taxes
- OECD: Tax Reforms Accelerating with Push to Lower Corporate Tax Rates
- Tax Foundation: The Return of Gross Receipts Taxes
- IRS: Rental Income and Expenses – Real Estate Tax Tips
- IRS: Tips on Rental Real Estate Income, Deductions and Recordkeeping
- Intuit TurboTax: Real Estate Tax and Rental Property
Dan is a co-owner, founder and partner at two small businesses, both active in multimedia production in Los Angeles and Cincinnati. He's contributed what he's learned about small business over the past decade to publications such as Chron Careers, Fortune, AZ Central Small Business Tech, GlobalPost Careers, GoBankingRates.com, Motley Fool, MSN Money and others.