What’s the difference between “income” and profit”?


And, more specifically, why are corporations and people taxed differently? Both have money coming in and going out for necessities

Does that make sense?

In: 0

Income by itself if the amount of money or other things of value that you bring in.

Profit is your total income minus your expenses. So if you bring in $100 but you spent $50 on manufacturing costs and wages then your profit was $50.

By taxed differently people can also claim expenses on their income that will lower their taxable income and so they get taxed less. Of course depending on the tax laws where the person lives, works, is a resident of, is a citizen of, etc.

“Income” is just that– money coming in. Profit is just a portion of income that is whatever you have left over after necessary expenses.

But those two words are usually not used together. Income is generally used in personal finance, whereas profit is used when talking about business. A better term to use in the latter area is “revenue” for total amount of money that a business receives in a given period. Minus operating costs, the rest is profits.

In this case, Income might be used like “Revenue”. Revenue is all the money a company received, that’s it. Profit is how much is left of the revenue after you remove things like taxes, loan payments and expenses like salaries, rent, and materials purchased.

In the case of a business, the tax codes are written in such a way as to allow them to deduct expenses before they have to pay taxes. In a similar way a person is usually to deduct things like mortgage interest, real estate taxes, and investment losses before they pay income tax.

In both cases, the taxes bill isn’t applied on every single dollar earned; it’s applied after certain allowed deductions are made.

Income is just that, any incoming flow of money. Profit is that income minus your costs, or expenses that were needed to generate the income.

Corporations are taxed differently because they provide a service, they employ people.

Consider this… The US government suddenly decides to tax Amazon at the same rate they would tax a normal person. Amazon then begins thinking of places they could move their headquarters to, or production facilities, warehouses… Etc that would give them the tax benefits they want in exchange for them bringing jobs and massive boosts to the economy to that country. They’d move and everyone in the US who worked for them are now unemployed and not contributing to the economy.

There are other reasons as well. Let’s take a big pharmaceutical company for an example. They create medicines that keep people alive, or at least, maintain them as long as possible. If all of a sudden they were threatened by massive tax hikes, or say, price fixing so they can’t choose their own prices anymore, what do you think they’d do? They’d threaten to cut off the supply or leave the country altogether for “friendlier waters”.

One last reason is that companies and corporations can write off so many expenses, charitable donations… Etc to counter their taxable values to the point where they almost seem to equal put and suddenly they owe nothing.

Suppose you buy something for $10 and sell it for $15.

You made an income of $15. Your profit was $5.

That’s the difference between income and profit.

Corporations and people are taxed differently because it wouldn’t make sense to use the same system. But businesses are pretty much taxed in the same way as people, it’s just more complicated and means there’s a lot more rules when it comes to businesses.

Income is all the money coming in. Expenses are all the money going out for business-related costs. Profit is the money that you have left once you remove all the expenses that need to be paid.

Some taxes (such as corporation tax) are levied just on profit. Other taxes (such as VAT) are levied on your overall income (which is very simplified, as befits an ELI5). In theory, different taxes are supposed to encourage different types of behaviour from businesses, or to discourage different types of behaviours, and that is (again, in theory) why there are so many taxes in play at the same time.

Businesses and individuals are taxed differently because people simply don’t have the earning power that businesses do. You can’t tax people as much as you can tax a business, because then the people won’t have enough money to live, and they all die.

If a business is generating enough income to pay the expenses associated with premises, stock, and paying the wages for some number of people, then that is quite a lot of money – much more than any one of those people can earn by themselves! And if the same business manages to do all of that and also make a profit at the end of the year, then that’s fantastic. A tax on profit then is supposed to encourage that the business should make less profit by spending more money on expenses such as wages for its own workers. (The government doesn’t lose out, because it then collects income tax from individuals, but this way it tries to nudge businesses towards paying better wages.)

If a person doesn’t manage to make any profit at the end of the year, after all living expenses are paid, then that person might go bankrupt or homeless. They may end up needing a financial helping hand from the government, and the government doesn’t want that. Therefore, it is better for the government if people still have money to live at the end of each month, whereas the government wants to tax businesses in such a fashion that businesses feel inclined to pay better wages to their workers.

Semantically, “profit” is “income” minus expenses. In order to have profit, there’s an implication that you must have expenses. Some types of income also have expenses, but others don’t. For example…

* Gross income (also called gross receipts) is the amount of money a person or a company earns for providing goods or services.
* Gross profit is gross income minus the cost of the product or service.
* For income taxes in the US, taxable income is these specific types of income minus these allowable deductions from your income. (Because income taxes have deductions and credits, they don’t have expenses – consistent with the first part.)
* Taxable profits aren’t really a thing, but taxable gains from selling investments are – because the investment had to be bought at a cost.

Why do we have separate laws for personal and corporate taxes? Although individuals and corporations both have the ins and outs you described, one set of rules wouldn’t fit both groups.

Let’s take meals and entertainment – in some cases, if a company is trying to make a customer or employee group happy, a restaurant meal might be a legitimate business expense, and it should be deducted from taxable income. If a business can deduct meals, what about individuals? Can I get a tax break for all of my DoorDash and Papa John’s?

Another example is what to do when a person or business owes zero tax. (Not zero tax as in they paid enough – zero tax as in their total tax bill is zero or negative.) If it’s a person, they can receive a refund for any income taxes they pre-paid, and in some cases they can even receive a refund that would amount to the federal government giving them money for the year. I wouldn’t want that same rule for businesses; imagine if a business would get paid by the federal government every time it showed a taxable loss. Instead of cashing out, companies get the equivalent of an airline flight voucher: they can carry the losses backward to an older year and/or forward to a future year to offset the taxable income in those years.

Everyone else here is technically correct but I think missing the point of your question. Income here refers to the money that individuals make from wages, while profits refer to money that companies make after accounting for all of their expenses. Since these are two different sources of economic activity, governments will often tax these two at different rates. The reason they might have one lower than another depends on whether they want to encourage/discourage certain kinds of economic activity, or whether they are worried about the welfare impacts of their taxes on individuals/companies. For example, if a government really wants to incentivize investment, they might lower the tax rate on profits, while another government might be worried that their people don’t have enough money to spend on goods and services, so they lower the income tax rate.

So even though it is true that both businesses and individuals have revenues and expenses to account for, there’s really no problem taxing them at different rates, it simply reflects the values of the government setting those rates