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

Question

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

Answer 1

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.