This example illustrates how the 25% Gross Income (GI) threshold is calculated for the 6-year statute of limitations (S/L) under tax law. The IRS extends the statute of limitations from 3 years to 6 years if a taxpayer omits more than 25% of their gross income from their return.
Breakdown of the Calculation:
- Gross Receipts: $300,000
- Cost of Goods Sold (COGS): ($200,000)
- Net Business Income: $100,000
- Capital Gains: $40,000
- Total Gross Income: $140,000
For the 25% threshold determination, the IRS considers gross receipts plus capital gains, but not net business income:
- Gross Receipts: $300,000
- Capital Gains: $40,000
- Gross Income for 25% threshold: $340,000
Key Takeaways:
- Capital gains are included in gross income, but only the gain amount, not the total sale proceeds.
- If a taxpayer omits more than 25% of this $340,000 (i.e., $85,000 or more), the IRS can apply the 6-year statute of limitations for audits.