taxable income

Examples of taxable income in the following topics:

• Overview of Income Tax Accounting

  • The result is the taxable income a company reports to the IRS may not be the same as the pre-tax profit reported on its financial statements.
  • Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year.
  • If a company realizes a net loss for tax purposes, the IRS allows the company to offset this loss against prior year's taxable income (which could result in a refund of taxes paid in prior periods).
  • If the company doesn't have the sufficient taxable income in the past three years to absorb the loss, then it may carry the remaining losses forward for 15 years.
  • This allows the company to deduct the loss against future taxable income.

• Tax Rate

  • An average tax rate is the ratio of the amount of taxes paid to the tax base (taxable income or spending).
  • To calculate the average tax rate on an income tax, divide the total tax liability by the taxable income.
  • A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending) and is often applied to the change in one's tax obligation as income rises.
  • It may be calculated by noting how tax changes with changes in pre-tax income, rather than with taxable income.
  • In U.S. income tax law, the term is used in relation to determining whether a foreign income tax on specific types of income exceeds a certain percentage of U.S. tax that might apply on such income.

• The Federal Tax System

  • Most business expenses reduce taxable income, though limits apply to a few expenses.
  • Individuals are permitted to reduce taxable income by personal allowances and certain non-business expenses that can include home mortgage interest, state and local taxes, charitable contributions, medical, and certain other expenses incurred above certain percentages of income.
  • State rules for determining taxable income often differ from federal rules.
  • Federal tax rates vary from 10% to 35% of taxable income.
  • Employers also must withhold income taxes on wages.

• Exposure Types

  • Tax exposure is fluctuations in currency exchange rates affect a company's cash flow, and hence its taxable income.
  • Thus, losses from transaction exposure can reduce taxable income, whereas losses from economic exposure reduce taxable income over future years.
  • On the other hand, translation exposures are not related to cash flows and do not reduce taxable income.

• Corporate Taxes

  • The individual reports all income and expenses for the business on his or her personal income tax statement.
  • For tax purposes, partnerships are treated similarly to a sole proprietorship - the owners pay tax on their "distributive share" of the business's taxable income.
  • In the United States, taxable income for a corporation is defined as all gross income (sales plus other income minus cost of goods sold and tax exempt income) less allowable tax deductions and tax credits.
  • States charge rates ranging from 0% to 10%, deductible in computing federal taxable income.
  • Some cities charge rates up to 9%, also deductible in computing Federal taxable income.

• Comparing Marginal and Average Tax Rates

  • An average tax rate is the ratio of the total amount of taxes paid, T, to the total tax base, P, (taxable income or spending), expressed as a percentage.
  • The marginal tax rate is sometimes defined as the tax rate that applies to the last (or next) unit of the tax base (taxable income or spending), it is in effect, the tax percentage on the highest dollar earned.
  • A progressive tax is a tax in which the tax rate increases as the taxable base amount increases .
  • A proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable base amount increases or decreases.
  • Graph demonstrates a progressive tax distribution on income that becomes regressive for top earners.

• Corporate and Payroll Taxes

  • The taxes may also be referred to as income tax or capital tax.
  • Most countries tax all corporations doing business in the country on income from that country.
  • Many countries tax all income of corporations organized in the country.
  • Company income subject to taxation is often determined much like taxable income for individuals.
  • Net taxable income for corporate tax is generally financial statement income.

• Federal Income Tax Rates

  • Federal income tax is levied on the income of individuals or businesses, which is the total income minus allowable deductions.
  • Federal income tax is levied on the income of individuals or businesses.
  • Individual income taxes often tax the total income of the individual, while corporate income taxes often tax net income.
  • Taxable income is total income less allowable deductions.
  • Capital gains are taxable, and capital losses reduce taxable income only to the extent of gains.

• Tax Deductions

  • A tax deduction is a reduction of the amount of income subject to tax.
  • Specifically, it is a reduction of the income subject to tax.
  • According to tax law, the United States allows as a deduction "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business..."
  • To fully understand the effect of tax deductions, we must consider the marginal tax rate, which is the rate of tax paid on the next or last unit of currency of taxable income.
  • While a deduction is a reduction of the level of taxable income, a tax credit is a sum deducted from the total amount of tax owed.

• Individual Taxes

  • Income tax is levied on the total income of the individual, less deductions, reducing an individual's taxable income, and credits, a dollar-for-dollar reduction of total tax liability.
  • State income tax rates vary from 1% to 16%, including local income tax where applicable.
  • The Federal estate tax is computed on the sum of taxable estate and taxable gifts, and is reduced by prior gift taxes paid.
  • These taxes are computed as the taxable amount times a graduated tax rate (up to 35%).
  • Taxable values of estates and gifts are the fair market value.