IRS designed the NRP to measure reporting compliance and determine the tax gap. The tax gap is the difference between the amount of tax that taxpayers should pay for a given year and the amount that is paid voluntarily and timely. The tax gap represents, in dollar terms, the annual amount of noncompliance with the tax laws.

The largest component of the tax gap comes from unreported and underreported income. Non-filing and underpayment of tax comprise the rest of the tax gap. NRP data suggest that well over half ($109 billion) of the individual underreporting gap came from understated net — underreported receipts and overstated expenses.

While the NRP data tell IRS quite a bit about the tax gap there is one critical unknown piece. The data do not reveal how much of the gap is attributable to willful non-compliance or carelessness and how much is the result of a lack of understanding by the taxpayer of his or her full tax obligation.

In an effort to assist small businesses and self-employed taxpayers to better understand their reporting, filing and payment obligations,

TaxACT has made it simple to complete your Business Income taxes, asking easy-to-follow interview questions while it automatically calculates for you.

To view details for the Adoption Credit using TaxACT:

Business Income, Gross Receipts or Sales

If there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.

Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifically excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.

But income can be in other forms, such as property or services. The following list includes some examples of other forms of income, such as:

• Bartering
• Real estate rents
• Personal property rents
• Interest and dividend income
• Canceled debt
• Promissory notes
• Lost income payments
• Damages
• Economic injury payments
• Kickbacks

All income earned is taxable. Directing payment to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.

Cost of Goods Sold

Some businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold (COGS) from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.

There are several factors that go into determining COGS including:

• Inventory at the beginning of the year
• Purchases less cost of items withdrawn for personal use
• Labor costs (generally applies to manufacturing and mining operations)
• Materials and supplies (generally a manufacturing cost)
• Other costs (generally applies to manufacturing and mining operations)
• Inventory at the end of the year

Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.

Gross Income

To calculate this, first determine net receipts (gross receipts minus returns and allowances) and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Then add any other income, including fuel tax credits. Gross must be determined first before deducting business expenses.

Links:

• Publication 334, Tax Guide for Small Business
• Publication 583, Starting a Business and Keeping Records