How to figure business income
Let's play business and do it like is done at the end of the year for income taxes.
Johnny first does his schedule C which will show his gross income of $10.00. Next come the business deductions which in his case are none.
Johnny must figure his cost of goods sold because he is in a selling type business.
Beginning inventory ----- $ .00
Goods purchased in 2005 + 5.00
Total Goods Available For Sale =5.00
Less Ending Inventory - .00
Cost of Goods Sold = 5.00
Business Income =10.00
Less Cost of Goods Sold - 5.00
Net Business Income = 5.00
Johnny now needs to complete the Self Employed SS form.
There will be no self employment tax because he is below the minimum amount.
Johnny still needs to do a 1040 to report his business income and the net business income is carried from the schedule C to the 1040 on the proper line.
Johnny has no other income either from working for an employer or interest .
So adding the net business income to the other items which are zero gives us the total income. Next Johnny is allowed to deduct certain expenses such as student loans, IRA deductions etc.
Johnny's total income $5.00 less these expenses of $.00 arrives at a figure of $5.00 for Johnny's Adjusted Gross Income.