Gross and net sales are two important aggregate figures for any business, but especially for businesses that sell retail products. Figuring these two measures and their relation to your gross and net profit are important to the IRS, and the agency's Publication 334 goes to great pains to make certain your business figures these correctly. The result could be an inaccurate return, which never leads to anything good.
Gross and Net
"Gross" and "net" are terms that come up almost constantly in business. Gross is a crude, aggregate measure that takes the full amount of something, without considering other variables. Net is when the gross amount is altered through new variables like business overhead, expenses, damage, rent and other things that cost the business money in order to operate. The gross measure is important because it shows how much could have been made if not for other operating variables. It is a continual measure to encourage business owners to cut overhead as much as possible.
Gross sales figures serve only as a benchmark. They do not accurately reflect the profit or health of the business. Like all figures labeled “gross,” it refers to the amount of total sales without taking any other measure into consideration.
When variables that affect the final sale price of an item are subtracted from the gross, the result is net sales. The IRS defines these variables this as anything that has an effect on the sale price. This would include returns of items from dissatisfied customers, damaged goods that are paid for but not sold, your own personal use of the merchandise, discounts for friends or customers, sales and coupon purchases, and bad checks. If someone purchases an item with a bad check, that item has, for the sake of your IRS return, not been sold. This would be included on gross but not net sales. The gross figure in these measures is higher than the net figure unless you have figured out a way to charge more for an item and get away with it. In this case, you would be in the rare position of having gross sales lower than net sales.
Sales are only a part of figuring gross and net profit. The IRS makes it clear that you do not need to report any item sold that is not part of the “income producing factor” of your business. Gross profits are the same as your net sales. Net profits are then figured by taking the net sales and taking from that anything else—not related to the sale price—that impinges on the cost of running your business. Net sales is therefore, are important part of figuring your net profit and must be reported to the IRS.