Calculating income sounds simple, but the answer depends on which income figure you are measuring. Gross income, operating income, and net income each tell you something different. Using the wrong one leads to the wrong conclusions.
Revenue is the starting point. It is the total amount your business earned from selling goods or services before any costs are subtracted.
Revenue includes:
Revenue does not include loans, investor capital, tax refunds, or asset sale proceeds. Those are separate categories.
Gross Income = Revenue - Cost of Goods Sold (COGS)
COGS covers the direct costs of producing your product or delivering your service: materials, direct labor, manufacturing overhead. Subtract COGS from revenue and you have gross income (also called gross profit).
Example: $800,000 in revenue, $320,000 in COGS = $480,000 gross income.
Operating Income = Gross Income - Operating Expenses
Operating expenses are the costs of running the business beyond direct production: salaries not tied to production, rent, utilities, marketing, software, and administrative costs.
From the example: $480,000 gross income minus $200,000 in operating expenses = $280,000 operating income. This is also called EBIT (Earnings Before Interest and Taxes).
Net Income = Operating Income - Interest Expense - Taxes
Net income is the bottom line. It is what remains after every cost has been accounted for: production, operations, debt service, and tax obligations.
From the example: $280,000 operating income minus $30,000 interest and $50,000 taxes = $200,000 net income.
Net income is not the same as cash. A business can show positive net income while burning cash if it is carrying large receivables (revenue earned but not yet collected), making capital investments, or repaying debt principal.
Always pair your net income figure with cash flow to get a complete picture of financial health.
EBITDA adds back depreciation and amortization to operating income to approximate cash-generating ability.
Taxable income differs from net income because tax law does not follow GAAP. Depreciation methods, deduction rules, and timing differences create a gap between the two.
Modified Adjusted Gross Income (MAGI) is an individual tax concept used to determine eligibility for deductions and credits. It applies to personal tax calculations, not business reporting.
