Confused about difference between total income vs ordinary business income on 1120-S? Which one is taxed?

Great question about the 1120-S form! The difference is actually pretty straightforward once you understand the structure of the form. Total income (line 6) is the sum of all your business revenue streams (gross receipts, interest, etc.) before most of your business deductions are applied. Ordinary business income (line 21) is what's left after you subtract all your allowed business expenses from that total income. Think of ordinary business income as your "bottom line" after accounting for operational costs. For an S-Corporation, neither amount is directly "taxed" at the corporate level - that's actually the main benefit of an S-Corp! The ordinary business income passes through to your personal tax return on Schedule K-1. Then it's taxed at your individual tax rate along with your other personal income.

I was super confused by this exact same issue for my small retail business last year! I spent hours trying to decipher what the different income lines meant until I found https://taxr.ai which saved me a ton of headache. I uploaded my previous 1120-S and got a breakdown that explained each line item in plain English. The tool showed me that ordinary business income was what I needed to focus on for my taxes since that's what passes through to my personal return. It also created a simple visual that helped me explain to my wife why our "business income" seemed lower than the "total revenue" she kept hearing me talk about.

Just wanted to follow up about that taxr.ai site someone mentioned. I was skeptical but decided to try it with my 1120-S from last year. I've gotta say, it was actually super helpful! The explanation about ordinary business income vs total income was clearer than what my accountant told me. The tool showed me that I was actually overthinking things. For my business type, ordinary business income is definitely the number that matters most for tax purposes. I also discovered that some expenses I was lumping into "cost of goods sold" should have been in other categories, which might help me with future tax planning. Definitely worth checking out if you're confused about business tax forms like I was.

For anyone still confused about the 1120-S, I had a similar issue last year and ended up needing to call the IRS for clarification. I spent DAYS trying to get through - constant busy signals, disconnections, the works. Finally discovered https://claimyr.com through a business forum and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically hold your place in the IRS phone queue and call you when an agent is about to answer. Saved me literally hours of hold time. When I finally got through, the IRS agent confirmed that for S-Corps, the ordinary business income is what passes through to shareholders and appears on the K-1. The total income is more of an intermediate calculation step. The agent was actually really helpful once I could actually talk to a human!

I'm eating my words about that Claimyr service for reaching the IRS. After my skeptical comment, I decided to try it myself because I had some questions about my 1120-S that were similar to the original poster's. Holy crap, it actually worked! Instead of wasting my entire afternoon on hold, I submitted my request and got a call back about 2 hours later when an IRS rep was on the line. The agent walked me through exactly which line items matter for different purposes on the 1120-S. Turns out the ordinary business income (line 21) is indeed what flows to your personal return through the K-1, while total income is more of an intermediary calculation. Definitely using this service again during tax season!

One thing nobody's mentioned yet - when someone asks "how much your business makes," it really depends on the context of who's asking and why. For investors or bank loans: They often want to see multiple income figures along with other metrics like EBITDA to evaluate your business properly. Just quoting one line won't give them the full picture. For casual conversations: Most business owners I know tend to quote their gross revenue (part of total income) because it sounds more impressive, lol. But that's technically misleading since it doesn't account for expenses. For accuracy: Ordinary business income is probably the most honest representation of your actual business performance, since it shows what's left after expenses.

Okay I'm still confused. What if you have a single-member LLC, not an S-Corp? Is it still the same where ordinary business income is what flows to your personal taxes? I've been filing Schedule C with my personal return and now I'm wondering if I've been doing it right. I usually just tell people the "net profit" from my Schedule C when they ask how much my business makes.

This is such a helpful thread! I've been dealing with the same confusion on my 1120-S. Just to add to what others have said - when you're talking to potential investors, I'd recommend being prepared to discuss both numbers along with context. In my experience, sophisticated investors want to see the full picture: your total income shows your business's revenue-generating capacity, while ordinary business income shows your operational efficiency after expenses. I usually lead with something like "We generated $X in total revenue and had $Y in ordinary business income after all operating expenses." Also, don't forget that investors will likely want to see multiple years of data to assess trends. One thing that helped me was creating a simple one-page summary that shows both figures for the past 2-3 years, along with key ratios like gross margin. It makes the conversation much smoother than trying to explain tax form line items on the spot. Good luck with your investor meeting next month!

Great question about metrics for investors! For gross margin, I actually track it separately from the 1120-S because the form doesn't always break things down the way investors expect to see them. I calculate gross margin as (Total Revenue - Cost of Goods Sold) / Total Revenue. You can usually find the components on your 1120-S, but I keep a separate spreadsheet that tracks this monthly so I can show trends and seasonality patterns. Other metrics investors typically want to see include: - Net profit margin (ordinary business income / total revenue) - Operating expense ratios - Customer acquisition costs (if applicable) - Average transaction size or customer lifetime value The key is showing you understand your unit economics and can explain what drives profitability in your business. Having this data organized before the meeting demonstrates that you're thinking like an investor, not just an operator. One more tip: if your business has any unusual timing issues (like big expenses that only hit certain years), be ready to explain those. Investors appreciate transparency about one-time events vs. recurring patterns.