Business Tax Preparation · Business Income

Gross receipts and other income

Two questions decide almost every issue in this topic. Is the item income at all, and if so, in which year? The first has a famously wide answer and a narrow set of exclusions. The second turns on the method of accounting, and the rules for the two methods have moved in opposite directions over the last decade.

The rule

Gross income. all income from whatever source derived, including but not limited to compensation for services, gross income derived from business, gains from dealings in property, interest, rents, royalties, dividends, annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, a distributive share of partnership gross income, and income in respect of a decedent^TY2026Verified 2026-08-21IRC § 61(a), opened at law.cornell.edu/uscode/text/26/61 (IRC § 61(a)). The phrase “from whatever source derived” does the work: an item is income unless a provision of the subtitle takes it out.

Gross income of a business. in a manufacturing, merchandising or mining business, gross income means total sales less the cost of goods sold plus any income from investments and from incidental or outside operations or sources^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3 (Reg. § 1.61-3(a)). This is the formula the exam tests, and its two halves are different in kind — sales are reduced by the cost of the goods sold, but everything else the business receives is simply added.

What may not be netted. gross income is determined without subtracting selling expenses, losses or other items not ordinarily used in computing cost of goods sold, and without subtracting amounts of a type for which a deduction would be disallowed under IRC § 162(c), (f) or (g)^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3 (Reg. § 1.61-3(a)). Selling expenses, losses and the disallowed payments of IRC § 162(c), (f) and (g) are not costs of goods sold. They are either deductions or nothing.

Timing on the cash method. income not actually reduced to possession is constructively received in the year it is credited to the account, set apart, or otherwise made available so that it could be drawn upon — unless control of its receipt is subject to substantial limitations or restrictions^TY2026Verified 2026-08-21Reg. § 1.451-2(a), opened at law.cornell.edu/cfr/text/26/1.451-2 (Reg. § 1.451-2(a)).

Timing on the accrual method. the all events test is met when all the events have occurred which fix the right to receive the income and the amount can be determined with reasonable accuracy^TY2026Verified 2026-08-21IRC § 451(b)(1)(C), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(b)(1)(C)) — and then for an accrual method taxpayer the all events test for an item of gross income is not treated as met any later than when the item is taken into account as revenue in an applicable financial statement, with exceptions for a taxpayer that has no such statement and for mortgage servicing contracts^TY2026Verified 2026-08-21IRC § 451(b)(1), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(b)(1)). For money received before it is earned, an accrual method taxpayer includes an advance payment in gross income in the year of receipt, unless it elects to include the portion required by IRC § 451(b) in that year and the remaining portion in the following taxable year^TY2026Verified 2026-08-21IRC § 451(c)(1), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(c)(1)), and the deferral election is effective for the year first made and all subsequent years unless the Secretary consents to revoke it, and the computation under it is treated as a method of accounting^TY2026Verified 2026-08-21IRC § 451(c)(2)(B), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(c)(2)(B)).

Gross receipts, where a threshold uses them. $32,000,000 — a corporation or partnership meets the gross receipts test for a taxable year beginning in 2026 if its average annual gross receipts for the 3-taxable-year period ending with the preceding taxable year do not exceed that amount. The figure for taxable years beginning in 2025 was $31,000,000, and the unindexed statutory base in IRC § 448(c)(1) is $25,000,000^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.30, read at irs.gov/pub/irs-drop/rp-25-32.pdf; 2025 figure from Rev. Proc. 2024-40 § 3.31, read at irs.gov/pub/irs-drop/rp-24-40.pdf; statutory base at IRC § 448(c)(1), read at law.cornell.edu/uscode/text/26/448 (IRC § 448(c)(1)), and gross receipts for a taxable year are reduced by returns and allowances made during that year, a short year is annualised by multiplying by 12 and dividing by the number of months, and a predecessor entity is counted^TY2026Verified 2026-08-21IRC § 448(c)(3), opened at law.cornell.edu/uscode/text/26/448 (IRC § 448(c)(3)).

Current figures

How it works in practice

Start from the presumption that it is income. IRC § 61(a) lists thirteen categories and says in terms that the list is not exhaustive. The practical consequence is that a question asking whether a receipt is income is really asking whether an exclusion applies, and if the facts name no exclusion the answer is yes. Bartered services, forgiven trade payables, prizes won by the business, recoveries of previously deducted amounts, interest on a bank balance and the sale of scrap all belong in gross income.

Then apply the business formula correctly. in a manufacturing, merchandising or mining business, gross income means total sales less the cost of goods sold plus any income from investments and from incidental or outside operations or sources^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3 (Reg. § 1.61-3(a)). Note what it does not say. It does not say gross income is net profit. Sales are reduced by cost of goods sold and by nothing else; investment income and incidental receipts are added at their full amount, not reduced by anything.

Do not let a deduction masquerade as a cost of goods sold. gross income is determined without subtracting selling expenses, losses or other items not ordinarily used in computing cost of goods sold, and without subtracting amounts of a type for which a deduction would be disallowed under IRC § 162(c), (f) or (g)^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3 (Reg. § 1.61-3(a)). This matters more than it looks, because gross income is the measuring stick for several other rules — filing thresholds, the six-year assessment period for a substantial omission, and the passive investment income fraction in subchapter S among them. Moving an item from the deduction column to the cost of goods sold column changes gross income without changing taxable income at all, and it is a favourite of examiners for that reason.

On the cash method, ask what the taxpayer could have had. income not actually reduced to possession is constructively received in the year it is credited to the account, set apart, or otherwise made available so that it could be drawn upon — unless control of its receipt is subject to substantial limitations or restrictions^TY2026Verified 2026-08-21Reg. § 1.451-2(a), opened at law.cornell.edu/cfr/text/26/1.451-2 (Reg. § 1.451-2(a)). A cheque received on 29 December and deposited in January is income in December; a cheque the customer wrote and held in a drawer is not. The distinguishing question is whether the taxpayer could have drawn on the amount, and the carve-out is for a substantial limitation or restriction — the taxpayer’s own preference not to collect is never one.

On the accrual method, the financial statement now sets a ceiling on deferral. for an accrual method taxpayer the all events test for an item of gross income is not treated as met any later than when the item is taken into account as revenue in an applicable financial statement, with exceptions for a taxpayer that has no such statement and for mortgage servicing contracts^TY2026Verified 2026-08-21IRC § 451(b)(1), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(b)(1)). The all events test used to be the only test, and a business could recognise revenue for book purposes in one year and for tax in a later one. IRC § 451(b) closes that: the tax year can be no later than the book year, though it can still be earlier. The rule only reaches a taxpayer that has an applicable financial statement, so a small business with unaudited accounts is unaffected.

Advance payments have a one-year deferral, and it is an accounting method. an accrual method taxpayer includes an advance payment in gross income in the year of receipt, unless it elects to include the portion required by IRC § 451(b) in that year and the remaining portion in the following taxable year^TY2026Verified 2026-08-21IRC § 451(c)(1), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(c)(1)). Without the election the whole payment is income on receipt. With it, the deferred portion is picked up in the very next year and no later — there is no matching to the period in which the service is performed beyond that. And the deferral election is effective for the year first made and all subsequent years unless the Secretary consents to revoke it, and the computation under it is treated as a method of accounting^TY2026Verified 2026-08-21IRC § 451(c)(2)(B), opened at law.cornell.edu/uscode/text/26/451 (IRC § 451(c)(2)(B)), so it cannot be turned on and off from year to year.

“Gross receipts” is not the same as “gross income.” Several provisions use the former as a size test rather than as a measure of income: $32,000,000 — a corporation or partnership meets the gross receipts test for a taxable year beginning in 2026 if its average annual gross receipts for the 3-taxable-year period ending with the preceding taxable year do not exceed that amount. The figure for taxable years beginning in 2025 was $31,000,000, and the unindexed statutory base in IRC § 448(c)(1) is $25,000,000^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.30, read at irs.gov/pub/irs-drop/rp-25-32.pdf; 2025 figure from Rev. Proc. 2024-40 § 3.31, read at irs.gov/pub/irs-drop/rp-24-40.pdf; statutory base at IRC § 448(c)(1), read at law.cornell.edu/uscode/text/26/448 (IRC § 448(c)(1)) is the best known. gross receipts for a taxable year are reduced by returns and allowances made during that year, a short year is annualised by multiplying by 12 and dividing by the number of months, and a predecessor entity is counted^TY2026Verified 2026-08-21IRC § 448(c)(3), opened at law.cornell.edu/uscode/text/26/448 (IRC § 448(c)(3)), and the aggregation rules of IRC § 448(c)(2) pull in related businesses. A question that gives you a figure labelled “gross receipts” is usually testing a threshold, not a computation of income.

How this has changed

Two information reporting thresholds changed for 2026, in opposite directions. Neither alters what is income, but both alter what a business will see reported to it, and stale material is wrong on each in a different way.

$2,000 — every person engaged in a trade or business who pays another person rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable gains, profits and income of that amount or more in a calendar year must render a return to the Secretary. The figure was $600 until Pub. L. 119-21 § 70433(a) substituted $2,000 for payments made after 31 December 2025, and IRC § 6041(h) indexes it for calendar years after 2026 in multiples of $100 (IRC § 6041(a), (h))^TY2026Verified 2026-08-21IRC § 6041(a), (h) and the 2025 amendment notes, read at law.cornell.edu/uscode/text/26/6041 (IRC § 6041(a)). the $600 figure in IRC § 6041(a) stood unchanged from 1954 until Pub. L. 119-21 § 70433 raised it to $2,000 for payments made after 31 December 2025 — the first time the threshold has ever been indexed^TY2026Verified 2026-08-19IRC § 6041 amendment notes, read at law.cornell.edu/uscode/text/26/6041 Pub. L. 119-21 § 70433(e) also rewrote the heading to “Payments exceeding threshold,” and a new IRC § 6041(h) indexes the figure from 2027. Pub. L. 119-21 § 70433(c) replaced the fixed amount in IRC § 6041A(a)(2) with a cross-reference, so non-employee compensation now tracks the same number. A business will receive fewer Forms 1099-NEC and 1099-MISC than in 2025.

a third party settlement organisation must report a participating payee third party network transactions only if the amount otherwise reportable exceeds $20,000 and the aggregate number of transactions exceeds 200. Pub. L. 119-21 § 70432(a) restored both tests and did so as if included in the 2021 Act that had replaced them with a flat $600 and no transaction count, so the $600 rule is treated as never having taken effect (IRC § 6050W(e))^TY2026Verified 2026-08-21IRC § 6050W(e) and the 2025 amendment and effective-date notes, read at law.cornell.edu/uscode/text/26/6050W (IRC § 6050W(e)). Pub. L. 119-21 § 70432(a)(1) restored both limbs of the former test, and § 70432(a)(2) made the restoration effective as if it had been included in the 2021 Act. the reduced threshold enacted by the American Rescue Plan was a single dollar figure of $600 with no transaction count; Pub. L. 119-21 § 70432(a)(2) made its repeal effective as if included in that Act, so it never operated as law for any year^TY2026Verified 2026-08-19IRC § 6050W(e) amendment and effective date notes, read at law.cornell.edu/uscode/text/26/6050W A business will receive fewer Forms 1099-K than the pre-2025 published guidance suggested, and a practitioner who relied on transitional notices is working from a rule that has been erased rather than repealed.

The accrual rules were rewritten in 2017 and the changes are now fully phased in. Pub. L. 115-97 § 13221 added IRC § 451(b) and IRC § 451(c), replacing the administrative deferral that had been available under earlier revenue procedures with a statutory one-year rule and adding the financial statement conformity requirement. The gross receipts test in IRC § 448(c) was raised by Pub. L. 115-97 § 13102 and is indexed by IRC § 448(c)(4) for taxable years beginning after 2018; for a taxable year beginning in 2026 the figure is $32,000,000 — a corporation or partnership meets the gross receipts test for a taxable year beginning in 2026 if its average annual gross receipts for the 3-taxable-year period ending with the preceding taxable year do not exceed that amount. The figure for taxable years beginning in 2025 was $31,000,000, and the unindexed statutory base in IRC § 448(c)(1) is $25,000,000^TY2026Verified 2026-08-21Rev. Proc. 2025-32 § 3.30, read at irs.gov/pub/irs-drop/rp-25-32.pdf; 2025 figure from Rev. Proc. 2024-40 § 3.31, read at irs.gov/pub/irs-drop/rp-24-40.pdf; statutory base at IRC § 448(c)(1), read at law.cornell.edu/uscode/text/26/448.

Exam focus

The single most testable item here is the Reg. § 1.61-3(a) formula. Learn it as three moves — total sales, less cost of goods sold, plus everything else — and be ready to reject an answer choice that has subtracted an operating expense.

Second, know which timing rule attaches to which method. Constructive receipt is a cash method doctrine; the all events test, financial statement conformity and the advance payment deferral are accrual method rules. A question that mixes them is testing whether you noticed the method.

Third, keep gross income and gross receipts apart. Gross receipts appear in size tests and are reduced only by returns and allowances; gross income is the measure in Reg. § 1.61-3(a).

Finally, treat information reporting as a separate subject. Whether a Form 1099 was issued, and at what threshold, has no bearing on whether the recipient has income.

Check yourself

1. A retailer has sales of $800,000, cost of goods sold of $500,000, advertising of $60,000, and $12,000 of interest on its reserve account. What is its gross income?

Answer: $312,000. in a manufacturing, merchandising or mining business, gross income means total sales less the cost of goods sold plus any income from investments and from incidental or outside operations or sources^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3 — sales less cost of goods sold is $300,000, and the interest is added at full value. The advertising is a deduction under IRC § 162 and gross income is determined without subtracting selling expenses, losses or other items not ordinarily used in computing cost of goods sold, and without subtracting amounts of a type for which a deduction would be disallowed under IRC § 162(c), (f) or (g)^TY2026Verified 2026-08-21Reg. § 1.61-3(a), opened at law.cornell.edu/cfr/text/26/1.61-3, so it does not reduce gross income even though it reduces taxable income.

2. A cash method consultant is told on 22 December that her fee has been credited to her account with the client and may be drawn at any time. She draws it on 4 January. In which year is it income?

Answer: The earlier year. income not actually reduced to possession is constructively received in the year it is credited to the account, set apart, or otherwise made available so that it could be drawn upon — unless control of its receipt is subject to substantial limitations or restrictions^TY2026Verified 2026-08-21Reg. § 1.451-2(a), opened at law.cornell.edu/cfr/text/26/1.451-2 (Reg. § 1.451-2(a)) — it was credited to her account and available without restriction, and her decision to wait is not a substantial limitation.

3. An accrual method business with no audited or SEC financial statements recognises revenue on its internal management accounts a year earlier than the all events test would require. Must it accelerate its tax reporting?

Answer: No. IRC § 451(b)(1)(B)(i) excepts a taxpayer that has no applicable financial statement within IRC § 451(b)(3). Internal management accounts are not one, so the all events test of IRC § 451(b)(1)(C) governs on its own.

4. A business receives $50,000 in November for services to be performed evenly over the next eighteen months, and elects deferral. How much is income in the year of receipt and the year following?

Answer: The portion taken into revenue in an applicable financial statement for the year of receipt is income then, and an accrual method taxpayer includes an advance payment in gross income in the year of receipt, unless it elects to include the portion required by IRC § 451(b) in that year and the remaining portion in the following taxable year^TY2026Verified 2026-08-21IRC § 451(c)(1), opened at law.cornell.edu/uscode/text/26/451 puts all of the remainder into the following year. The eighteen-month service period is irrelevant — the deferral is one year and does not follow performance.

5. A sole proprietor is paid $1,400 for a job and receives no Form 1099-NEC because the payer applied the current threshold. Does she have income?

Answer: Yes, $1,400 under IRC § 61(a)(2). The reporting threshold is an obligation of the payer under IRC § 6041 and IRC § 6041A and says nothing about the recipient’s gross income. The 2026 threshold is $2,000 — every person engaged in a trade or business who pays another person rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable gains, profits and income of that amount or more in a calendar year must render a return to the Secretary. The figure was $600 until Pub. L. 119-21 § 70433(a) substituted $2,000 for payments made after 31 December 2025, and IRC § 6041(h) indexes it for calendar years after 2026 in multiples of $100 (IRC § 6041(a), (h))^TY2026Verified 2026-08-21IRC § 6041(a), (h) and the 2025 amendment notes, read at law.cornell.edu/uscode/text/26/6041, so payments of this size are now commonly unreported.