A welding contractor reports $420,000 in customer invoices, $3,200 in scrap-metal sales, a $1,500 insurance refund, and a $6,000 recovery on a 2023 bad debt previously written off. Every dollar is gross business income. Miss the scrap, the refund, or the recovery, and Schedule C is understated before you ever touch deductions.
Gross receipts are total sales of goods and services before any deduction. For a cash-method taxpayer, income is recognized when actually or constructively received. For an accrual-method taxpayer under §451(b), income is recognized when all events fixing the right to receive it have occurred and the amount is determinable with reasonable accuracy, but no later than the year reported on an applicable financial statement (the AFS conformity rule).
- Bartered goods or services at fair market value (§61, Reg. §1.61-2(d))
- Scrap, by-product, and salvage sales
- Recovered bad debts previously deducted (tax-benefit rule under §111)
- Recovery of expenses or taxes previously deducted, to the extent of prior tax benefit
- Cancellation-of-debt income (covered below)
Common mistakes
- Forgetting to add scrap sales, bad-debt recoveries, and bartered services to gross receipts. The tax-benefit rule under §111 makes recovered deductions income up to the amount of prior tax benefit.
- Capitalizing selling and distribution costs into inventory under UNICAP. §263A captures production and resale costs, never selling expenses; advertising and order-fulfillment shipping stay deductible.
- Treating a single-member LLC as automatically exempt from at-risk rules. §465 applies to the individual owner, who reports the LLC's activity on Schedule C; nonrecourse debt outside the real estate exception still does not boost the at-risk amount.
Bottom line
- Gross receipts include cash and accrual sales, barter at FMV, scrap, kickbacks, finder's fees, interest on receivables, refunds of previously deducted expenses (tax-benefit rule), and recovered bad debts.
- COGS formula: Beginning Inventory + Purchases + Labor + Materials/Supplies + Other Costs − Ending Inventory. Direct production labor stays in COGS, not SG&A.
- Inventory methods: FIFO, LIFO (Form 970 election, conformity rule), specific identification, weighted average. LIFO must use cost; FIFO may use lower of cost or market.
- UNICAP §263A capitalizes direct and indirect production/resale costs into inventory; small-business exception for average gross receipts ≤ $31 million (2025).
Exam shortcut
See $31M average gross receipts: think §448 small-business test. Cash method + no UNICAP + inventory as supplies + no percentage-of-completion all flow from that single threshold. See "personal guarantee" or "recourse note" in an at-risk question: increase at-risk by the loan balance. See "nonrecourse" without "real estate": exclude it. See Form 1099-C plus liabilities > asset FMV: insolvency exclusion is the answer.
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Learning objectives
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