Business Tax Preparation · Business Income

Gross receipts and other income

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

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^TY2026 (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^TY2026 (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)^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (IRC § 448(c)(3)).

Current figures

Item	Rule	Authority
Gross income defined	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^TY2026	IRC § 61(a)
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^TY2026	Reg. § 1.61-3(a)
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)^TY2026	Reg. § 1.61-3(a)
Timing of cost of goods sold	cost of goods sold is determined under the method of accounting the taxpayer consistently uses, and an amount cannot enter the computation any earlier than the taxable year in which economic performance occurs with respect to it^TY2026	Reg. § 1.61-3(a)
Constructive receipt	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^TY2026	Reg. § 1.451-2(a)
All events test	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^TY2026	IRC § 451(b)(1)(C)
Financial statement conformity	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^TY2026	IRC § 451(b)(1)
Advance payments	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^TY2026	IRC § 451(c)(1)
The deferral election	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^TY2026	IRC § 451(c)(2)(B)
Gross receipts test, 2026	$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^TY2026	IRC § 448(c)(1)
Computing gross receipts	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^TY2026	IRC § 448(c)(3)
Information reporting threshold	$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))^TY2026	IRC § 6041(a)
Payment card and network reporting	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))^TY2026	IRC § 6050W(e)

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^TY2026 (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)^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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^TY2026 (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.

The formula, applied to a real set of books

Ardingly Hardware Inc. has sales of $2,400,000, cost of goods sold of $1,450,000, salesmen’s commissions of $190,000, interest on its operating account of $6,000, a $28,000 gain on the sale of a delivery van, and $4,000 received from a supplier as a settlement of a warranty claim.

Gross income under Reg. § 1.61-3(a) is $2,400,000 less $1,450,000, or $950,000, plus the $6,000 of interest, the $28,000 gain and the $4,000 settlement — $988,000.

The commissions are not in that figure. They are 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)^TY2026. A preparer who treats them as a cost of the goods sold reports gross income of $798,000 and the same taxable income, which looks harmless until the return is measured against a threshold that uses gross income.

Note also that three of the four additions are not sales at all. The formula adds “any income from investments and from incidental or outside operations or sources” without qualification.

The cheque in the drawer

Delahay Surveying, a cash method sole proprietorship, finishes a job on 15 December 2026. The client writes a cheque on 27 December and telephones to say it is ready for collection. The proprietor, wanting the income in 2027, does not collect it until 6 January.

The amount is income in 2026. 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^TY2026 (Reg. § 1.451-2(a)) — it was set apart and made available, and the only thing standing between the proprietor and the money was her own decision not to fetch it. That is not a substantial limitation.

Change one fact. Suppose the client had told her the cheque would not be signed until the client’s own year-end audit was complete in February. Now there is a real restriction outside her control, nothing has been made available to her, and the income belongs to 2027.

The test is never what the taxpayer did. It is what the taxpayer could have done.

The three-year maintenance contract

Calderbank Systems Inc., an accrual method business with audited accounts, sells a three-year maintenance contract on 1 October 2026 for $90,000 received in full. Its accounts recognise $7,500 of revenue in 2026 and the rest across 2027 to 2029.

Without an election under IRC § 451(c)(1)(B), the whole $90,000 is income in 2026 under IRC § 451(c)(1)(A). With the election, the portion required by IRC § 451(b) to be included in the year of receipt — the $7,500 taken into revenue in the accounts — is income in 2026, 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^TY2026 puts the remaining $82,500 into 2027.

Note what the election does not do. It does not match the income to the three years over which the service is performed. The deferral is to the following year and stops there, so $82,500 is taxed in 2027 even though $52,500 of it will not be earned for book purposes until 2028 and 2029.

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^TY2026 (IRC § 451(c)(2)(B)) — having made the election, the company must keep using it.

Traps.

Gross income is not net profit. {fig:income.business_gross} (Reg. § 1.61-3(a)). Only cost of goods sold is subtracted, and only from sales.

Selling expenses are never cost of goods sold. {fig:income.no_netting} (Reg. § 1.61-3(a)). Neither are losses, nor amounts disallowed under IRC § 162(c), (f) or (g).

Constructive receipt has nothing to do with intention. Reg. § 1.451-2(a) asks whether the taxpayer could have drawn on the amount, and treats a limitation as relevant only if it is substantial.

IRC § 451(b) is a ceiling, not a floor. It stops an accrual taxpayer recognising income later than the accounts do. It does not stop the tax year being earlier, and it does not apply at all to a taxpayer with no applicable financial statement.

The advance payment deferral is one year, full stop. {fig:income.advance_payment} (IRC § 451(c)(1)). A five-year contract does not get five years of deferral.

An amount is income whether or not a Form 1099 reports it. Information reporting thresholds are obligations of the payer. They do not define the payee's gross income, and the two 2026 changes below move in opposite directions without touching IRC § 61 at all.

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))^TY2026 (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^TY2026 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))^TY2026 (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^TY2026 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^TY2026.

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^TY2026 — 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)^TY2026, 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^TY2026 (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^TY2026 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))^TY2026, so payments of this size are now commonly unreported.

Change log

2026-08-21Initial draft. Sets out IRC § 61(a) and the Reg. § 1.61-3(a) computation of gross income from a manufacturing, merchandising or mining business, the prohibition on netting selling expenses into it, the constructive receipt rule of Reg. § 1.451-2(a) for cash method businesses, and the IRC § 451(b) financial statement conformity and IRC § 451(c) advance payment rules for accrual method businesses. Records the two 2026 information reporting changes that move in opposite directions: the IRC § 6041 threshold raised to $2,000 and the IRC § 6050W threshold restored as if the reduction had never been enacted.