Ask An Accountant: Paying Your Taxes On Profit

It’s almost December so I know many of you may be scrambling to get your year end tax information organized.  My Ask An Accountant series should help with many questions that may arise.  Remember, if you have a tax question, email my husband who is an experienced accountant at cjwtaxpro@gmail.com

Question:
I have a small business and I was wondering if I pay my taxes based on the income I earn or the income left after I have paid expenses?

Answer:


You would pay your taxes on the net profit.  Net profit is calculated as follows:

Gross Revenues – Cost of Goods Sold (Direct Costs if a service business) – Operating Expenses (advertising, bank fees, rent, subcontractors, etc…) – Depreciation of Fixed Assets = Net Profit.  Keep in mind that not all cash outflows are considered expenses.  For example, purchase of inventory, sales tax payments, principal payments on loans, payroll withholding payments, loans or distributions to owner/member/shareholders, and personal income tax payments or estimated tax payments are not expenses.

Please keep in mind this post is for informational purposes only and answers given are very general. Do not rely on this column for definite tax answers as many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org
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