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Ask an Accountant: What is Net Profit?

by Dana Zeliff on December 28, 20112011-12-28
in Worth Reading

Disclosure: This post may contain an affiliate link.

Thanks to Mom on Dealz for sharing her series, Ask an Accountant! Sharon is married to an experienced accountant. We’re heading back into tax season so get your tax questions answered from a professional.

See more Ask an Accountant posts to see if you’re tax question has been answered.

It’s almost December so I know many of you may be scrambling to get your year end tax information organized.

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

Filed Under: Worth Reading Tagged With: Ask an Accountant

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Hi! I'm Dana, the writer behind the scenes of The Coupon Challenge, a Hampton Roads, VA based coupon blog. I'm a wife and mother of 2. After getting out of debt we started using our savings to travel together as a family and create memories.

Are you looking for ways to save your family money? I strive to help you save on the products you need, so you can spend more on the things you want. Read More about Dana & Family

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