What Are Gross Receipts? Inclusions, Exclusions, and Tax Thresholds

Gross receipts are the total amount of money your business takes in from every source during its tax year, counted before you subtract any costs, expenses, or deductions.¹ It’s the top-line number on your tax return, and the IRS uses it to decide which accounting method you can use, whether you qualify as a small business taxpayer, and which annual return your nonprofit has to file. For tax years beginning in 2026, a business whose average annual gross receipts over the prior three years stay at or below $32 million qualifies to use the simpler cash method of accounting.²

What Counts as Gross Receipts

The figure starts with what customers pay you for products or services, but the Treasury regulations reach much further. Gross receipts include the following, whether or not they come from your primary business activity:³

Interest of any kind, including bank interest, original issue discount, and tax-exempt interest
Dividends from investments
Rents received for the use of property
Royalties from intellectual property
Annuity payments
Commissions earned representing other parties
Amounts received for services of any kind

One point catches many owners off guard: gross receipts are not reduced by cost of goods sold. If you buy inventory for $60,000 and sell it for $100,000, the full $100,000 goes into the gross receipts calculation. Your cost of the merchandise comes out later, when the return moves from gross receipts down toward taxable income.³

What Doesn’t Count

Not every deposit into your business account belongs in gross receipts. Some inflows either aren’t real income or reverse a transaction that was already counted.

Sales Taxes You Collect

Sales taxes are excluded from gross receipts only when the tax is legally imposed on the buyer and you are simply the conduit forwarding it to the taxing authority. If your state or locality imposes the tax on your business instead, the collected amount stays in gross receipts even though you pass it through to customers.³ Which side of the line you fall on depends on state law.

Returns, Allowances, and Discounts

Refunds to customers reduce gross receipts because they reverse the original sale, and the same treatment applies to allowances and credits you issue. Cash discounts given at the point of sale mean you record only what you actually received: a $500 item sold with a $50 discount produces $450 of gross receipts.³

Loan Proceeds and Principal Repayments

Borrowed money is not income. Loan proceeds you receive, and the return of principal on loans you made to others, stay out of the calculation. Interest you earn on a loan you made, though, does count.

Capital Asset Sales

When you sell a capital asset or trade-or-business property, only the gain enters gross receipts, not the full sale price. Subtract your adjusted basis from what you received. A machine sold for $80,000 with an adjusted basis of $50,000 adds $30,000 to gross receipts.³ This gain-only rule applies to capital assets and business-use property. Inventory and other property held primarily for sale to customers go in at the full sale amount.

Gross Receipts vs. Gross Income

The two terms get used interchangeably, and they aren’t the same. Gross receipts is the broader number, capturing every dollar received before anything is taken out, including before cost of goods sold. Gross income is what’s left after you subtract cost of goods sold from gross receipts.

A retailer that takes in $500,000 in sales and paid $200,000 for the merchandise sold has $500,000 in gross receipts and $300,000 in gross income. The gross receipts test under Internal Revenue Code Section 448(c) looks at the larger number. Taxable income calculations start from gross income and then subtract operating expenses, depreciation, and other deductions.

How to Calculate Your Gross Receipts

Pick your accounting period first. Most businesses use the calendar year, though a fiscal year ending on the last day of any other month is allowed.⁴

Then add up every inflow for those twelve months: sales revenue, service income, interest, dividends, rents, royalties, commissions, and any other amounts received. From that total, subtract customer refunds and allowances, sales taxes collected for a taxing authority where the tax was legally imposed on the buyer, and any loan proceeds that landed in a revenue account by mistake. For capital asset and business-property sales, replace the sale price with the net gain over adjusted basis. Leave cost of goods sold alone at this stage. The result is your gross receipts for the year.

Where gross receipts show up on the return depends on your entity, but on nearly every business form it’s the first line of the income section, and every deduction and credit on the return flows down from it.⁵⁶

Why the Number Matters

The IRC 448(c) Small Business Test

The federal gross receipts test is the main reason this number carries weight for taxes. Your business passes if its average annual gross receipts over the three prior tax years don’t exceed the inflation-adjusted threshold. The statutory base is $25 million,⁷ and for tax years beginning in 2026 the adjusted figure is $32 million.²

Passing the test lets C corporations, partnerships with C corporation partners, and tax shelters use the cash method, recognizing income when payment arrives rather than when it’s earned. Failing forces a switch to accrual accounting, which can trigger an immediate tax hit as outstanding receivables come onto the books. And you can’t sidestep the threshold by splitting the business: the tax code requires businesses treated as a single employer under its controlled-group and affiliated-service-group rules to combine their gross receipts.⁷

Nonprofit Filing Thresholds

For a tax-exempt organization, gross receipts decide which annual return you owe the IRS:

Normally $50,000 or less: eligible to file Form 990-N, the electronic e-Postcard.⁸
Under $200,000 with total assets under $500,000: eligible for the shorter Form 990-EZ.⁹
$200,000 or more, or total assets of $500,000 or more: must file the full Form 990.⁹

An organization that misses its filing for three consecutive years loses tax-exempt status automatically.

SBA Size Standards

The Small Business Administration uses annual receipts as a primary size standard for deciding whether a business qualifies as “small” for federal set-aside contracts, the 8(a) Business Development program, HUBZone preferences, and 7(a) loans.¹⁰ The SBA’s definition of “receipts” is broad: all revenue in whatever form, from every source, reduced by returns and allowances.

State Gross Receipts Taxes

Several states impose a tax directly on gross receipts rather than on net income. About seven states have a statewide gross receipts tax, and a handful of others allow local governments to levy one. The rates usually look small, often well under 1%, but the base has no deductions for expenses, labor, or cost of goods sold. A business can owe the tax while losing money: $5 million in revenue against $5.2 million in expenses still produces tax on the full $5 million. Low-margin industries feel this most, and the obligation can arise from sales into a state even without a physical presence there.

Records You Need to Back Up the Number

The IRS expects you to substantiate every dollar of reported gross receipts. Cash register tapes, bank deposit slips covering cash and credit sales, receipt books, invoices, and Forms 1099-MISC from clients all support the figure.¹¹

The general retention rule is three years from the date the return was filed or its due date, whichever is later. Underreporting income by more than 25% of gross income extends the IRS’s audit window to six years. If you never filed a return, or filed a fraudulent one, there is no time limit at all.¹² Keeping records for seven years covers most scenarios.

1
Internal Revenue Service. Gross Receipts Defined
2
Internal Revenue Service. Rev. Proc. 2025-32
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eCFR. 26 CFR 1.448-1T
4
Internal Revenue Service. Tax Years
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Internal Revenue Service. 2025 Instructions for Form 1120
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Internal Revenue Service. 2025 Schedule C (Form 1040)
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Office of the Law Revision Counsel. 26 USC 448
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Internal Revenue Service. Annual Electronic Notice (Form 990-N) FAQs
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Internal Revenue Service. 2025 Instructions for Form 990-EZ
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eCFR. 13 CFR Part 121
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Internal Revenue Service. What Kind of Records Should I Keep
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Internal Revenue Service. How Long Should I Keep Records