What this line means
Line 3 minus line 4. This is your revenue after subtracting returns and the direct cost of products you sold. For service businesses with no cost of goods sold, gross profit equals line 3. This is not your taxable profit — business expenses (lines 8-27) still need to be subtracted.
Does this apply to you?
- Every Schedule C filer completes this line — it is a calculated field
- If you have no cost of goods sold (most service businesses), this equals line 3
- Tax software calculates this automatically
Easy to overlook
Gross profit is not net profit Gross profit is the number before business expenses are subtracted. A business with $100,000 in gross profit and $80,000 in expenses has only $20,000 in net profit (line 31). Do not use this number for estimated tax payments or financial planning — use line 31. 1 IRS Schedule C instructions — Line 5
COGS errors compound here If your cost of goods sold calculation in Part III is wrong, this line is wrong, and so is everything downstream. The most common Part III error is counting unsold inventory as a cost. If your gross profit margin looks unusually high or low compared to your industry, recheck Part III. 2 General filing pattern — COGS errors flowing to gross profit
Watch out for this
Confusing gross profit with net profit when making quarterly estimated tax payments. Paying estimated taxes on $100,000 gross profit when your net profit is $20,000 results in massive overpayment. Always use net profit (line 31) as the starting point for estimated tax calculations.
Footnotes
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IRS Schedule C (Form 1040) Instructions, Line 5. https://www.irs.gov/instructions/i1040sc ↩
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IRS Schedule C (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩