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Once you have added up all your gross business income, and you've dug up all your deductible business expenses for the year, you can calculate your net business income by subtracting your expenses from your income. Hopefully, you still have some income left over after expenses are deducted! This amount is your net profit for tax purposes.
For sole proprietors, the net profit calculation is made on the bottom of the front page of your Schedule C or on Line 3 of your C-EZ. If you have more than one Schedule C, the results from each one are computed separately. The results from any and all Schedule Cs you have are totaled up and carried over to your individual income tax return (Form 1040, Line 12,) where they will become part of your adjusted gross income (AGI). If you are filing jointly with your spouse, the net income from any Schedule C's filed by your spouse is also included.
There are two more important issues to deal with in conjunction with computing your net profit for the year:
- Self-employment taxes - for sole proprietors, your net business income is the amount on which you must pay self-employment taxes. So, your net business profit or loss is also carried over to Line 2 of Schedule SE, which is used to compute your self-employment (SECA) tax. If your business is a partnership, LLC, or corporation, you must follow somewhat different rules.
- Net operating losses - owning a business is full of surprises, both good and bad. In some years you may find that your expenses exceed your gross business income, which means that you have a loss for the year. You may be able to deduct this loss against any other income you or your spouse may have, or carried over to other years in which you have more income, provided you meet certain requirements.