Taxable profit | Taxable earnings
/Taxable profit is the profit upon which income taxes are payable. The composition of taxable profit varies by taxation authority, so it will vary depending upon the rules of the taxation authorities within which an entity is located or does business. For instance, a government may declare that certain qualifying organizations have nonprofit status, so that any of their qualifying earnings are not subject to income tax. Taxable profit is primarily based on operating earnings, but other types of taxable earnings can come from dividend income, interest income, and capital gains on the sale of long-term assets.
Different tax rates may apply to the various types of taxable earnings. There may also be graduated tax rates that apply to different amounts of taxable profit.
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Example of Taxable Profit
Monckton Manufacturing, a small business, calculates its taxable profit for the year based on revenue, deductible expenses, and allowable tax adjustments. The process it used to derive its taxable profit is as follows:
Step 1: Calculate Gross Revenue
Total sales revenue: $500,000
Other business income (e.g., rental income): $20,000
Total Gross Revenue = $520,000
Step 2: Deduct Allowable Business Expenses
Cost of goods sold: $200,000
Employee salaries: $100,000
Rent and utilities: $30,000
Office expenses and supplies: $10,000
Marketing and advertising: $15,000
Depreciation on equipment: $10,000
Loan interest: $5,000
Total Deductible Expenses = $370,000
Step 3: Determine Taxable Profit
Taxable Profit = Gross Revenue – Deductible Expenses
$520,000 – $370,000 = $150,000
Step 4: Apply Any Tax Adjustments
The company qualifies for a tax credit of $5,000 for energy-efficient equipment
Final Taxable Profit = $150,000 – $5,000 = $145,000
The company’s taxable profit is $145,000, which will be subject to corporate income tax based on the applicable tax rate.