For individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods, including inventory and certain labor costs.
Why Is Gross Income Important?
Gross income is the starting point for calculating individual or business tax liability.
Individuals determine gross income by adding all sources of income. However, not all gross income is taxable. For example, certain types of income—such as the non-taxable portion of Social Security benefits or employer-provided health insurance—may be excluded from taxation or not appear on tax returns at all.
Taxpayers add the taxable components of gross income to compute their total income, from which they subtract “above-the-line” deductions (such as retirement contributions or student loan interest) to calculate adjusted gross income (AGI). They then subtract either the standard deduction or itemized deductions, and, if applicable, the qualified business income deduction, to arrive at taxable income.
Businesses calculate gross income by subtracting COGS from gross receipts or sales. From gross income, they add other types of income (such as interest and royalties) and deduct other business expenses (such as employee compensation, rent, depreciation, and loss carryforwards) to arrive at taxable income.
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