dependency exemption

[ardi600]

a qualifying relative can not make more than 3800 to be a dependent. On sch C, is that net income? client has a 1099 for 12000 but after expenses, his earning from self employment or sch c is 2230. does he meet the gross income test?

[smithtax]

IRC §152(d):

(1) The term "qualifying relative", means with respect to any taxpayer for any taxable year, an individual

(B) whose gross income for the calendar year in which such taxable year begins is less than the exemption amount

[taxea]

gross income is the total placed on the income line of the Sch C, not the net after expenses.

[Gary2]

gross income is the total placed on the income line of the Sch C, not the net after expenses.

Specifically, the Gross Income line, which is line 7, i.e., after deducting COGS and returns.

[taxea]

Specifically, the Gross Income line, which is line 7, i.e., after deducting COGS and returns.

Where in the code is that addressed? I believe gross income is the total income the business took in before any deductions.

[Gary2]

Where in the code is that addressed? I believe gross income is the total income the business took in before any deductions.

It's in the regs at 1.61-3.

[taxea]

It's in the regs at 1.61-3.

That does not apply to a cash business. The OP didn't say anything about type of accounting so I didn't read accrual into the post.

[Gary2]

That does not apply to a cash business. The OP didn't say anything about type of accounting so I didn't read accrual into the post.

COGS relates to inventory, which is normally accrual even when the overall business is cash (hence "hybrid"). But there's nothing in 1.61-3 saying it's accrual only. It just says "cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer," whatever that may be.

Schedule C makes this quite clear, by labeling line 7 as Gross Income. Indeed, the number you're suggesting (all income with no deductions) never even appears on Sch. C, because COGS is subtracted before other income is added.

[smithtax]

Depends

I agree partially with Gary2.

Reg. §1.61-3 discusses the gross income of a "..manufacturing, merchandising, or mining business..".

IRC §61(a)(2) merely mentions "gross income derived from business".

The determination of gross income of a business generally depends on whether the business is a manufacturing and merchandising business or a services business. There are special rules that apply in determining the gross income of farmers. There are also special rules that apply in determining the gross income received from government contracts.

In a manufacturing, merchandising, or mining business, gross income is generally total sales (i.e., gross receipts) less the cost of goods sold. Gross income also includes any income from investments and from incidental or outside operations or sources (Reg. Sec. 1.61-3(a); Woodside Acres, Inc. v. Comm'r, 134 F.2d 793 (2nd Cir. 1943); Garrett Holding Corp. v. Comm'r, 9 T.C. 1029 (1947); Sullenger v. Comm'r, 11 T.C. 1076 (1948)).

In a service business, gross income is total sales (i.e., gross receipts) without any reduction for the cost of producing such income. In other words, for a service business, gross income is synonymous with gross receipts (Webber v. Comm'r, 219 F.2d 834 (10th Cir. 1955); Sutor v. Comm'r, 17 T.C. 64 (1951); Rev. Ruls. 74-374, 71-369, 70-347).

[taxea]

COGS relates to inventory, which is normally accrual even when the overall business is cash (hence "hybrid"). But there's nothing in 1.61-3 saying it's accrual only. It just says "cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer," whatever that may be.

Schedule C makes this quite clear, by labeling line 7 as Gross Income. Indeed, the number you're suggesting (all income with no deductions) never even appears on Sch. C, because COGS is subtracted before other income is added.

Again, no mention in OP of this as an issue and if the business doesn't keep an inventory then this is not in play and gross income is the total of non 1099, 1099, interest, and other income.

[Gary2]

I agree partially with Gary2.

That's funny, because I agree totally with you.

It wasn't my intent to get into all the intricacies of business reporting, but in a service business, there are no goods, and hence no COGS, so yes, gross income is gross receipts (plus other gross income, and I'm betting those cases would allow the deduction of refunds). I don't think we need to deal with the borderline cases, instances where a service business also provides some products, or accounting for software sold on CD versus sold via download or license.

Again, no mention in OP of this as an issue and if the business doesn't keep an inventory then this is not in play and gross income is the total of non 1099, 1099, interest, and other income.

Yeah, so? It doesn't say it wasn't an issue, either, so it behooves us to give a precise answer. Your answer said "income line" - that doesn't exist on Sch. C, so I clarified it to say "Gross Income" line, which does exist. There's no reason to make more of it than that.