what are key things to look at when reading tax returns to tell if a business is profitable?

Answer 1

Many people would only look at the bottom line, ie whether or not they're making money.

This would be found on lines 1-4 on schedule M-1 of Page 4 of an 1120S. This line is the net difference between revenue and expenses

This is not indicative as to whether or not the business could meet any future debts or trying to figure out what the business is worth. If you want the kind of information you need to request a tax return, a compilation (or reviewed/audited) financial statement and possibly a statement of cash flows.

Be careful if you're looking at just a tax return, this is can be very misleading if an accountant is involved and they're trying to drive income down in order to avoid taxes.

Answer 2

Adam is correct. It depends upon of whether the tax return is for a big business using tax accounting rules which differ from financial statement rules. For smaller businesses that use the cash method for accounting the bottom line for net profit is fair to use - but add back any depreciation deduction which is a noncash item - and any salary paid owner is profit to the owner.

Answer 3

Forget the tax returns entirely. Audited financial statements are much more useful for determining profitability. They are also easier to read.