Net of tax definition
/What is Net of Tax?
Net of tax is the initial (or gross) results of a transaction or group of transactions, minus the related income taxes. The term is most commonly associated with the results of an entire business, such that its profits or losses are described as being "net of tax" if the effects of income taxes are calculated into the profits or losses. A sample presentation of this term in an income statement appears in the following exhibit.
If income taxes are not included in a profit or loss calculation, then the profit or loss is said to be "before tax." The net of tax concept is useful for reporting the complete results of a transaction, inclusive of the effects of income taxes. Several variations on the net of tax concept are noted below:
Accounting requirements. The GAAP and IFRS accounting frameworks sometimes specify that the results of certain activities be reported in the financial statements net of tax. These items are reported after the results of operations in the income statement.
Impact of loss carryforwards. If a company has a large net operating loss carryforward, there will not be any tax to offset against income, since the loss carryforward offsets the tax. In this case, the net of tax profit figure will be the same as the before tax profit figure.
Usage by nonprofits. An entity designated by the government as a not-for-profit does not pay income taxes, and so does not use the net of tax concept in its financial reporting.
Application to individual transactions. The concept can also be used when evaluating the proceeds of an individual financial transaction. For example, if a factory is sold for a gain, the net of tax amount of that gain represents the true proceeds from the sale. This can be of great importance to the selling shareholders, who may earn much less net of tax than they might have been expecting.
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Example of Net of Tax
An example of net of tax is when ABC Company reports a before tax profit of $1,000,000. After subtracting the related $350,000 of income taxes, ABC reports income net of tax of $650,000.