2.3.  Taxation of Ordinary Income

Ordinary income for a business is the profit it earns from its normal day-to-day operations. It includes profit from selling a product or providing a service. It also includes interest income. Ordinary income is distinguished from a capital gain, which is the income earned by selling a capital asset. The importance of the distinction is that ordinary income and capital gains are taxed at different rates.

Earlier in this chapter we distinguished between current expenses and capitalized costs. Current expenses consist of the cost of the products that are sold, operating expenses, and interest expense. The cost of goods sold is the cost directly associated with making the sold products, including the cost of materials, shipping and handling, and labor production costs. Operating expenses are costs that are re