[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.61-3]

[Page 35]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.61-3  Gross income derived from business.

    (a) In general. In a manufacturing, merchandising, or mining 
business, ``gross income'' means the total sales, less the cost of goods 
sold, plus any income from investments and from incidental or outside 
operations or sources. Gross income is determined without subtraction of 
depletion allowances based on a percentage of income to the extent that 
it exceeds cost depletion which may be required to be included in the 
amount of inventoriable costs as provided in Sec. 1.471-11 and without 
subtraction of selling expenses, losses or other items not ordinarily 
used in computing costs of goods sold or amounts which are of a type for 
which a deduction would be disallowed under section 162 (c), (f), or (g) 
in the case of a business expense. The cost of goods sold should be 
determined in accordance with the method of accounting consistently used 
by the taxpayer. Thus, for example, an amount cannot be taken into 
account in the computation of cost of goods sold any earlier than the 
taxable year in which economic performance occurs with respect to the 
amount (see Sec. 1.446-1(c)(1)(ii)).
    (b) State contracts. The profit from a contract with a State or 
political subdivision thereof must be included in gross income. If 
warrants are issued by a city, town, or other political subdivision of a 
State, and are accepted by the contractor in payment for public work 
done, the fair market value of such warrants should be returned as 
income. If, upon conversion of the warrants into cash, the contractor 
does not receive and cannot recover the full value of the warrants so 
returned, he may deduct any loss sustained from his gross income for the 
year in which the warrants are so converted. If, however, he realizes 
more than the value of the warrants so returned, he must include the 
excess in his gross income for the year in which realized.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7207, 37 FR 20767, Oct. 5, 1972; T.D. 7285, 38 FR 26184, 
Sept. 19, 1973; T.D. 8408, 57 FR 12419, Apr. 10, 1992]