Tax profit

Tax profit

Tax profit or taxable profit is used to distinguish between accounting profit or earnings (the number that is generally referred to in financial results for public companies and quoted in the press). Taxable profit is the number that is used to calculate profit tax.

For a number of reasons, taxable profit may differ from reported earnings, and may be higher or lower.

Company financial reports often distinguish between profit before tax and after-tax profit.

Example

A company has accounting profit before tax of $100, but due to the use of accelerated depreciation, has a taxable profit of $50. The company pays profit tax at a rate of 20%.

In this simple example, the company would report the following:
#Profit before tax: $100
#Taxable profit: $50
#Taxes: $10
#After-tax profit: $90

Depending on the reason for the differences between profit before tax and taxable profit, the company may show a tax liability or tax asset to account for future taxes. Depending on the circumstances and the accounting standards, taxes paid in cash and taxes shown on the profit and loss statement may also differ.

Taxable profit is rarely shown in the published financial statements. Due to the differences between nominal tax rates and actual taxes paid, analysts sometimes refer to the effective tax rate, which is (actual) taxes divided by profit before tax. In the example above, the effective tax rate would be 10%.


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