Taxes on Gross Vs. Net Income for Business
A business can take in plenty of revenue without actually earning any income at the end of the day. Revenue is the amount that you receive in exchange for products and services, while income is the amount you ultimately earn after figuring in how much it cost to generate your sales revenue. Business taxes can be levied on either gross revenue or net income, depending on the agency and the purpose of the tax.
To calculate net income, subtract your total operating expenses from your total business revenue. Revenue includes income from services and wholesale and retail sales. Operating expenses include all expenses and purchases that the Internal Revenue Service includes as legitimate business deductions, including cost of materials, payroll, rent, utilities, auto expense, depreciation, interest payments, rent, bank account service charges, licenses, fees and business taxes. The difference between your inventory at the start and the end of the accounting period also qualifies as an operating expense.
Business net income usually provides the basis for the individual income taxes of business owners. If you own a sole proprietorship, your company's net income equals your personal taxable earnings from the business regardless of whether you have withdrawn these funds or left them in your business account. The same is true for a partnership, which divides the tax liability for business income relative to each owner's share of the equity. A business structured as a limited liability company or corporation may pay its owners a salary, and the company's net income exceeding this salary is the basis for business income tax.
A revenue tax is levied on a company's gross sales. Because it uses a higher figure than an income tax as its basis, one that has not had operating expenses subtracted, revenue tax rates tend to be much lower than income tax rates. For example, an income tax rate might be 15 percent, while a revenue tax rate might be less than half of 1 percent. Business revenue taxes are often called "excise taxes," and they are levied by state and local governments.
Sales tax is a tax on business revenue, but it is paid by the customer rather than the business. Businesses are required to collect state and local sales taxes by adding them to transactions at the register. Companies are also required to keep track of these funds and remit them periodically to the appropriate agencies along with reports showing the sales figures that are the basis for these taxes. Sales tax may differ for different types of purchases such as cars or clothing, and in many states grocery food for home consumption is not subject to any sales tax at all.