What are the two differences between accounting income and taxable income?
The concept of accounting profit differs from taxable profit, in the sense that the latter is the amount which is taxable as per the provisions of the income tax act. It is calculated by taking into account accounting profit and then adding the non-allowable expenses less allowable expenses and the incomes credited in Profit and Loss account. Show
Take a read of this article excerpt that will provide you a thorough understanding on the difference between accounting profit and taxable profit. Content: Accounting Profit Vs Taxable ProfitComparison ChartBasis for ComparisonAccounting ProfitTaxable ProfitMeaningThe term accounting profit refers the company's income obtained after reducing total expenses from total revenues.The term taxable profit refers to the profit of the business which is taxable as per income tax rules.BasisAccounting StandardIncome Tax Act 1961YearFinancial YearIncome of Previous Year is Taxable in Assessment Year.ObjectiveTo know the profitability and performance of the entity. To know the taxability of the entity.To know the taxability of the entity.AuditFinancial AuditTax Audit Definition of Accounting ProfitAccounting Profit is the result of operating and non-operating activities of the company. It is the actual financial gain obtained after reducing total expenses from total revenue of the business. It reflects the company’s profitability and performance in the future. It also determines that how accurately the resources of the entity are allocated. For knowing the company’s liquidity and solvency, accounting profit is very helpful to the users of the financial statement. The financial year starts from 1st day of April and ends on the 31st day of March. Definition of Taxable ProfitThe amount of profit which is taxable as per the Income Tax Act, 1961 under the head Profit and Gains from Business or Profession, is known as taxable profit. It is derived by taking accounting profit as a base. Every year the return is furnished to the income tax department for the previous year in the assessment year. On the basis of this return the taxable profit and the tax thereof is calculated which is to be paid by the company. In this profit, disallowed expenses are added back. For Example – If the Assessment Year is 2015-2016, then the Previous Year will be 2014-2015. Key Differences Between Accounting Profit and Taxable ProfitThe difference between accounting profit and taxable profit can be drawn clearly on the following grounds:
ConclusionThere are many points which differentiate the two entities which are discussed here in detail. In simple words, both of them are correct in their place. Accounting Profit is calculated as per the accounting principles and assumptions while the taxable profit is calculated as per the prescribed tax rules of every country. Both the profits are calculated for a specific period. Many times accounting profits is greater than the taxable profit. Taxable income is the portion of your gross income used to calculate how much tax you owe in a given tax year. It can be described broadly as adjusted gross income (AGI) minus allowable itemized or standard deductions. Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and various types of unearned income. Key Takeaways
1:16 Taxable IncomeUnderstanding Taxable IncomeTaxable income consists of both earned and unearned income. Unearned income that is considered taxable includes canceled debts, government benefits (such as unemployment benefits and disability payments), strike benefits, and lottery payments. Taxable income also includes earnings generated from appreciated assets that have been sold during the year and from dividends and interest income. When it comes to deductions, the IRS offers individual tax filers the option to claim the standard deduction or a list of itemized deductions. Itemized deductions include interest paid on mortgages, medical expenses exceeding a specific threshold (7.5% of your AGI), and a range of other expenses. When businesses file their taxes, they do not report their revenue directly as taxable income. Rather, they subtract their business expenses from their revenue to calculate their business income. Then, they subtract deductions to calculate their taxable income. Tax brackets and marginal tax rates are based on taxable income, not gross income. Sources of Taxable IncomeTaxable income is any income you earn during the tax year. The most common is employee compensation. But there are other sources of income that are taxable. Employee CompensationAs noted above, this is the most common type of taxable income. This comes in the form of salaries and wages, tips, bonuses, and fees that are paid to you by your employer. The income is reported to you on your W-2, which the company sends out to you by mail. This form also includes any applicable deductions to your taxable income, such as income tax, Social Security, Medicare, and 401(k) contributions, among others. According to the IRS, people who provide child care either in their own homes or elsewhere must include the amount they receive as taxable income. This rule also applies to any money you receive if you babysit. If you receive certain fringe benefits as a director, partner, or through your employer, you must include their value, too. The IRS has a full list of what's taxable and exemptions on its website. Income From Business and InvestmentsYou are responsible for declaring any income you earn from certain types of business and investment activity. This includes any rental income you receive from properties that you earn. It doesn't matter if the rental activity you receive is the result of a business, or if you earn it for a profit. Keep in mind that you may be able to declare the expenses related to the rental, which can offset the income you receive. Income from PartnershipsThe IRS doesn't tax partnership entities but any income, deductions, and losses that stem from these entities are passed through to individual partners. As such, the partnership doesn't pay taxes. If you're a partner, you must declare any pass-throughs on your annual tax return. This must occur even if the pass-through doesn't apply to you directly. Income from S CorporationsJust like a partnership, this type of corporation doesn't pay any income tax on earnings. This is passed through to shareholders based on their ownership stake in the S corporation. if you're a shareholder, earnings, losses, and deductions are reported on your personal income tax return. Other Sources
How to Calculate Taxable IncomeHere's a step-by-step guide to calculating taxable income. Step 1: Determine Your Filing StatusTo calculate your taxable income for an individual tax return, you first need to determine your filing status. If you are unmarried, you can file your taxes either as a single filer or, if you have a qualifying person for whom you pay more than half of the support and housing costs as head of household (HOH). If you are married, you will most likely want to file as married filing jointly. However, there are some limited instances when it may make sense to file as married filing separately. Step 2: Gather Documents for all Sources of IncomeWhen you know your filing status, you will need to gather documents for all sources of income for yourself, your spouse (if applicable), and any dependents (if applicable). The total of all these sources of income is known as your gross income. Below are the most common tax forms that you will need in order to calculate your gross income.
Step 3: Calculate Your Adjusted Gross Income (AGI)The next step is to calculate your AGI. Your AGI is the result of taking certain “above-the-line” adjustments to your gross income, such as contributions to a qualifying individual retirement account (IRA), student loan interest, and certain education expenses. These items are referred to as “above the line” because they reduce your income before taking any allowable itemized deductions or standard deductions. Step 4: Calculate Your Deductions (Standard or Itemized)The next step is to calculate your deductions. As mentioned above, you can either take the standard deduction or itemize your deductions. The standard deduction is a set amount that tax filers can claim if they don’t have enough itemized deductions to claim. For the 2022 tax year, individual tax filers can claim a $12,950 standard deduction ($13,850 for 2023) or $19,400 ($20,800 for 2023) if they are heads of households. For those who are married filing jointly, the standard deduction is $25,900 ($27,700 for 2023). If you plan to itemize deductions rather than take the standard deduction, these are the records most commonly needed:
Owners of sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for a qualified business income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of QBI, real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income. If you are an independent contractor, then your work will most likely qualify for this special deduction. Step 5: Calculate Taxable IncomeFor the final step in calculating your taxable income, you will need to take your AGI, calculated above, and subtract all applicable deductions. As part of the American Rescue Plan, student loan forgiveness issued from Jan. 1, 2021, to Dec. 31, 2025, will not be taxable to the recipient. Taxable Income vs. Nontaxable IncomeThe IRS considers almost every type of income to be taxable, but a small number of income streams are nontaxable. For example, if you are a member of a religious organization who has taken a vow of poverty, work for an organization run by that order, and turn your earnings over to the order, then your income is nontaxable. Similarly, if you receive an employee achievement award, then its value is not taxable as long as certain conditions are met. If someone dies and you receive a life insurance payment, then that is nontaxable income as well. Different tax agencies define taxable and nontaxable income differently. For example, while the IRS considers lottery winnings to be taxable income in the United States, the Canada Revenue Agency considers most lottery winnings and other unexpected one-time windfalls to be nontaxable. What Does Taxable Income Mean?The term taxable income refers to any gross income earned that is used to calculate the amount of tax you owe. Put simply, it is your adjusted gross income less any deductions. This includes any wages, tips, salaries, and bonuses from employers. Investment and unearned income are also included. What Is Unearned Income?Examples of unearned income subject to taxation by federal or state authorities include interest, dividends, and rents, along with capital gains. Other forms of taxable income can derive from loans that have been forgiven, government benefits (like disability or unemployment benefits), and winnings from casinos or lotteries. How Is Taxable Income Calculated?Taxable income is calculated by adding up all sources of income, excluding nontaxable items, and subtracting credits and deductions. What Is Nontaxable Income?Examples of nontaxable income include earnings made from a religious or charitable organization that are subsequently returned to that organization. Another example can be an employee achievement award, as long as certain conditions are met. If someone dies and you receive a life insurance benefit, that is also nontaxable income (although it may subject you to an estate tax). How Do I Lower My Taxable Income?Ending the year with a taxable income can put you into a higher tax bracket, which means you'll have a higher tax bill. Most people lower this figure by taking the standard deduction when you file your return. Or, if you itemize, make sure you factor in every deduction possible. But there are ways to lower your taxable income even before you file. Contributing to a retirement account like a 401(k) or an individual retirement account, setting money aside in a flexible spending or health savings account. The Bottom LineIncome is any compensation you receive for providing a service. The most common form is, of course, money. But what most people don't realize is that there are other forms of income, including property and services in-kind. And all of these are taxable. Knowing what to include can make filing your taxes easy and hassle-free. To avoid any complications, use the information and tips above to ensure that you calculate and declare your taxable income accurately. What is the difference between accounting and taxation?While accounting encompasses all of a company's operations, taxation is more about creating strategies to help companies better complete their tax returns. Taxation also concerns individuals who are required to file tax returns annually.
Why is there a difference between accounting profit and taxable profit?These differences arise when an item is included in one type of reporting (accounting or tax) but is permanently excluded from the other type of reporting. Items that are included in the determination of accounting profit but not taxable profit can be both revenue and expense items.
What is the difference between accounting income?Accounting income reveals the net profits generated by a business after all expenses have been accounting for, while gross income only reveals the difference between revenues and the cost of goods sold; gross income does not include the effects of selling, general and administrative expenses.
What is an accounting income?Accounting earnings, the bottom line of the income statement, fall into the former category. The income statement, one of three financial statements used for reporting financial performance, lists all revenues, expenses, gains, and losses over a specific accounting period.
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