What is ‘Gross Income’
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BREAKING DOWN ‘Gross Income’
Gross income is an individual’s income and receipts from nearly all sources. It is the starting point for determining the taxes that individual will pay. Sources of gross income include salary, wages, tips, capital gains
, rents, pensions
. Even income from illegal activities is included: in 1961 the Supreme Court ruled in James v. United States
that failure to report income from criminal activities to tax authorities is itself a crime.
Some sources of income are excluded from gross income. These include some interest on municipal and state bonds, some Social Security benefits, certain gifts and inheritances, some retirement plan contributions, life insurance payouts and some income from the sale of a home. Unless there is a specific exemption, however, any income is considered gross income.
For a business, gross income has a slightly different meaning. Often it will appear on a public company’s income statement
as either “gross income” or “gross profit.” If it is not present, it can be calculated by subtracting the cost of goods sold
(also called cost of revenue
and other variations) from total revenue (also “total sales” and other variations):
gross income = total revenue – cost of goods sold
A business’ gross income can be used to calculate its gross margin, a measure of profitability. Confusingly, gross margin is sometimes used as a synonym for gross income and is expressed as a dollar amount (or in another currency). The more precise usage, however, distinguishes gross margin from gross income, so that gross margin is an expression of gross income as a percentage of total revenue:
gross margin % = gross income ÷ total revenue * 100
What constitutes a good or bad gross margin depends on the industry. Providers of specialized services generally make higher margins than retailers, for example. Just as important as gross margins relative to industry peers are a company’s gross margins from year to year. While a number of factors can cause falling margins, they generally deserve an explanation from management. Rising margins, on the other hand, are a sign of increased efficiency.
Here is an example of how to calculate gross income and gross margin, using Johnson & Johnson’s (JNJ
) income statement from the third quarter of fiscal
2015 (all amounts in millions of USD
|Sales to customers
|Cost of products sold
|Selling, marketing and administrative expenses
|Research and development expense
|In-process research and development
|Interest (income) expense, net
|Other (income) expense, net
|Earnings before provision for taxes on income
|Provision for taxes on income
This income statement was included in an investor presentation and does not show gross income. You can go to the SEC’s website, where quarterly 10-Q filings
are shown in a standardized format and “gross profit” will appear on the third line of the income statement. It is easy enough to calculate it yourself, however, by subtracting cost of goods sold (always the second line, here “cost of products sold”) from total revenue (always the top line, here “sales to customers”):
gross income = total revenue ($17,102m) – cost of goods sold ($5,224m) = $11,878m
In order to put that number in context, divide it by the company’s total revenues to obtain the gross margin:
gross margin = gross income ($11,878m) ÷ total revenue ($17,102m) = 69.45%
For comparison, that is slightly lower than its gross margin in the third quarter of 2014, at 70.76%. Other major drug makers have higher gross margins, but these do not engage in the lower-margin businesses Johnson & Johnson does, such as selling baby shampoo, bandages and moisturizers.
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What is ‘Capital Gain’
BREAKING DOWN ‘Capital Gain’
A capital loss is incurred when there is a decrease in the capital asset value compared to an asset’s purchase price.
While capital gains are generally associated with stocks and funds
due to their inherent price volatility, a capital gain can occur on any security that is sold for a price higher than the purchase price
that was paid for it. Realized capital gains and losses occur when an asset is sold and triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but have not yet triggered a taxable event.
Tax Consequences of Capital Gains and Losses
Tax-conscious mutual fund investors should determine a mutual fund’s
unrealized accumulated capital gains, which are expressed as a percentage of its net assets, before investing in a fund with a significant unrealized capital gain component. This circumstance is referred to as a fund’s capital gains exposure
. When distributed by a fund, capital gains are a taxable obligation for the fund’s investors.
Short-term capital gains occur on securities held for one year or less. These gains are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains are usually taxed at a lower rate than regular income. The long-term capital gains rate is 20% in the highest tax bracket. Most taxpayers qualify for a 15% long-term capital gains tax rate. However, taxpayers in the 10% and 15% tax brackets would pay a 0% long-term capital gains tax rate.
Capital Gains Distributions by Mutual Funds
Mutual funds that have accumulated realized capital gains throughout the course of the year must distribute those gains to shareholders. Many mutual funds distribute capital gains right before the end of the calendar year.
Shareholders of record as of the fund’s ex-dividend date receive the fund’s capital gains distribution. Individuals receiving the distribution get a 1099-DIV form detailing the amount of the capital gain distribution and how much is considered short-term and long-term. When a mutual fund makes a capital gain or dividend distribution, the net asset value (NAV) drops by the amount of the distribution. A capital gains distribution does not impact the fund’s total return.
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