Chapter 7 Figuring Gross Profit After you have figured the gross receipts from your business(chapter 5) and the cost of goods sold (chapter 6), you are ready tofigure your gross profit. You must determine gross profit before youcan deduct any business expenses. These expenses are discussed inchapter 8. If you are filing Schedule C-EZ, your gross profit is yourgross receipts plus certain other amounts, explained later underfive star hotel in KatowiceAdditions to Gross Profit. If you are filing Schedule C, you figure your gross profit by firstfiguring your net receipts. Do this on Schedule C by subtracting anyreturns and allowances (line 2) from gross receipts (line 1). Returnsand allowances include cash or credit refunds you make to customers,rebates, and other allowances off the actual sales price. Next, subtract the cost of goods sold (line 4) from net receipts(line 3). The result is the gross profit from your business. You do not have to figure the cost of goods sold if the sale ofmerchandise is not an income-producing factor for your business. Yourgross profit is the same as your net receipts--gross receiptsminus any refunds, rebates, or other allowances. Most professions andbusinesses that sell services rather than products can figure grossprofit directly from net receipts in this way. Illustration.This illustration of the gross profit section of the incomestatement of a retail business shows how gross profit is figured. Income Statement Year Ended December 31, 1999 Gross receipts $400,000 Minus: Returns and allowances     14,940 Net receipts $385,060 Minus: Cost of goods sold    288,140 Gross profit $96,920 The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900 Minus: Items withdrawn for personal use      2,650    283,250 Goods available for sale $321,095 Minus: Inventory at end of year     32,955 Cost of goods sold $288,140 Items To Check Testing Gross Profit Accuracy Additions to Gross Profit