taxable income

Examples of taxable income in the following topics:

• 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.

• 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.

• Effects of GAAP on the Income Statement

  • GAAP's assumptions, principles, and constraints can affect income statements through temporary (timing) and permanent differences.
  • Although most of the information on a company's income tax return comes from the income statement, there often is a difference between pretax income and taxable income.
  • GAAP reporting also suggests that income statements should present financial figures that are objective, material, consistent, and conservative.

• 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.

• Cost of Capital Considerations

  • Because of tax advantages on debt issuance, such as the ability to deduct interest payments from taxable income, it will be cheaper to issue debt rather than new equity.

• 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.

• Stock Dividends vs. Cash Dividends

  • Stock or scrip dividends are those paid out in the form of additional stock shares of either the issuing corporation or another corporation.Cash dividends provide investors with a regular stream of income.
  • Cash dividends are immediately taxable under most countries' tax codes as income, while stock dividends are not taxable until sold for capital gains (if stock was the only choice for receiving dividends).
  • This can be seen as a huge benefit of stock dividends, particularly for investors of a high income tax bracket.
  • As such, receiving stock dividends does not increase a shareholder's stake in the firm; by contrast, a shareholder receiving cash dividends could use that income to reinvest in the firm and increase their stake.
  • When choosing between cash or stock dividends, the trade-off is between liquidity in the short-term or income from capital gains in the long-term.

• Dividend Payments and Earnings Retention

  • Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid.
  • Dividends paid do not show up on an income statement but do appear on the balance sheet.
  • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
  • Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.
  • The dividend payout ratio is equal to dividend payments divided by net income for the same period.

• Elective Expensing

  • . § 179) allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated.
  • If a taxpayer places more than 2 million dollars worth of section 179 property into service during a single taxable year, the 179 deduction is reduced, dollar for dollar, by the amount exceeding the 2 million threshold.
  • Lastly, the section provides that a taxpayer's 179 deduction for any taxable year may not exceed the taxpayer's aggregate income from the active conduct of trade or business by the taxpayer for that year.
  • If, for example, the taxpayer's net trade or business income from active conduct of trade or business was 72,500 dollars in 2006, then the deduction cannot exceed 72,500 dollars that year.