What is Net Income?

Net income, also called net profit or the bottom line, is revenue minus all expenses: cost of goods sold, operating expenses, interest, depreciation and, for corporations, income taxes. A negative result is a net loss.

Book income vs taxable income

Net income on your financial statements often differs from taxable income on your return. Common reasons include:

• Meals that are only partly deductible
• Depreciation methods that differ between books and taxes
• Nondeductible penalties
• Federal income tax expense of a C corporation

Corporate and partnership returns reconcile book income to taxable income on Schedule M-1 or M-3; see Form 1120.

Net income vs cash

Net income does not equal cash generated. Loan principal payments, equipment purchases and owner draws use cash but do not reduce net income; depreciation reduces net income but uses no cash. The cash flow statement reconciles the two.

Owner compensation

For sole proprietors and partnerships, owner draws are not expenses, so net income represents what the owners earned before paying themselves. For corporations, owner salaries are expenses. Compare businesses carefully for that reason.

Net profit margin

Net income divided by revenue gives net margin, a useful trend measure; see small business financial ratios.

For sole proprietors, net profit flows from Schedule C to the individual return and is generally subject to self-employment tax, as the IRS explains on its self-employment tax page.

Related terms

• Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.
• Operating Expenses: Operating expenses are the costs of running a business that are not directly tied to producing the goods or services sold.
• Cash Flow Statement: The cash flow statement shows how cash moved into and out of a business, grouped into operating, investing and financing activities.
• Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.

Browse more definitions in the small business glossary.