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# How to Calculate Taxable Income for a Company

The Internal Revenue Code provides for various deductions and tax credits for businesses.

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Generally, taxable income of a company is calculated by taking its gross sales, less permissible deductions for its various ordinary and necessary business expenses. The character and form of income and deductions varies from industry to industry and from company to company, but in general taxable income is determined with comparable methods and reported via similar requirements regardless of the entity.

1. Determine gross sales. Depending on the industry, the company may have sold products, leased equipment, licensed intellectual property, charged interest, or billed for fees to comprise its gross revenues. Regardless of the type of revenue, total sales are the gross income of the company for a particular tax year and appear as the top line on tax Forms 1120 and 1065 for corporate and partnership tax returns (see Resources).

2. Determine cost of goods sold. If the company is a retailer, it would have bought its inventory from a wholesaler and marked it up for resale. If so, calculate the cost of goods sold and report it for the determination of gross profit in tax reporting. If the company does not sell products, ignore cost of goods sold since its operating costs will be reflected elsewhere on the tax return.

3. Itemize typical business expenses. IRS Forms 1120 and 1065 call for the itemized reporting of specific categories of business expenses. These categories of typical business expenses include salaries and wages, repairs and maintenance, bad debts, rent, taxes, interest and depreciation, among other things.

4. Calculate depreciation. For certain political and economic reasons, there are various depreciation methods for classes of property that allow for different periods over which business equipment and vehicles may be depreciated. To promote investment in new equipment, these special deductions allow immediate or accelerated depreciation, and require careful classification and tracking of assets. See the instructions for IRS Form 4562 for detailed instructions on various asset classes and their respective depreciation methods (see Resources).

5. Calculate taxable income. Simply subtract cost of goods sold (if applicable), deductions for ordinary and necessary business expenses, and depreciation from gross income. Taxable income may not always be positive, as a company can show a loss that may result in a tax deduction for its owners.