Net Income Calculator

Setting it out

Net income is what remains after every expense: revenue less returns, cost of goods, operating expenses, interest and tax. It is the bottom line in the literal sense, the last figure on a profit and loss statement.

For a company it is profit after tax available to shareholders. For a sole trader it is the profit the tax is calculated on, and the owner's drawings are not an expense in arriving at it. That distinction catches out a great many first-year self-employed sellers who deduct what they paid themselves and file a much smaller number than they owe tax on.

A concrete case

Revenue $960,000, returns $115,200, cost of goods $337,920, operating expenses $488,832, interest $9,600. Pre-tax profit is $8,448. At a 20% rate, tax is $1,690 and net income is $6,758.

For a sole trader with the same trading figures and $48,000 of drawings, the drawings are not deducted. Taxable profit is $56,448, tax at a combined marginal rate of 28% is $15,805, and net income after tax is $40,643, of which $48,000 has already been withdrawn.

The two treatments produce very different numbers from identical trading, and mixing them up is the single most common error in small business tax planning.

What the number hides

Net income is an accounting figure and not a cash figure. A business can show positive net income and have no money, because stock purchases and receivables absorb cash without appearing as expenses.

It is also affected by non-cash charges. Depreciation reduces net income without reducing cash in the period, which means a capital-heavy business generates more cash than its net income suggests and a stock-heavy one generates less.

Where to go from here

Reconcile it against the change in the bank balance every quarter. The difference is stock movement, receivables, payables, capital expenditure and drawings, and being able to explain that difference is the clearest sign that the accounts are being understood rather than merely produced.

Set tax aside against it as it accrues rather than at year end. For a sole trader that means a standing transfer of the estimated rate on profit, not on revenue and not on drawings.

Net income and what an acquirer will do to it

A buyer will not use your net income figure. They will rebuild it: adding back the owner's salary and benefits, removing one-off costs, normalising anything that will not continue under new ownership, and subtracting the cost of whatever has to be replaced.

That means the reported figure matters less than the quality of the records behind it. A business with clean categorisation, consistent treatment across years and explanations for anomalies produces a rebuild that a buyer trusts. One without produces a rebuild that a buyer discounts.

The practical implication for any owner who might sell within a few years: the accounting discipline is worth more than the tax optimisation. Running personal costs through the business reduces this year's tax bill by a fraction of the amount, and reduces the eventual sale price by the amount times the multiple.