How to Calculate Corporate Taxable Income Formulas

by Dennis Hartman

Corporate taxable income refers to the portion of profits that businesses make and must pay income taxes on to government agencies. Paying taxes cuts into a company's profits, which is why businesses seek tax shields that reduce the amounts they owe. Investors with access to financial and tax data can compare companies based on their taxable income. This can help determine which companies are able to keep their profits to reinvest, and which surrender more of their income to tax authorities.

Tax Rates

Determine a company's net income by examining its financial statements. This information will appear on the income statement as a sum of revenue from all sources during the year, minus the sum of all expenses.

Find the company's total income tax liability. This information will only appear in corporate tax records, which high-level investors and financial consultants have access to. Add any prepayments to the income tax figure if they have been subtracted elsewhere on the tax form.

Note the company's taxable income, which will be different from the net income. Taxable income only represents the taxable portion of a company's profits. Divide the company's total tax liability by the statutory tax rate listed on the government's tax table to calculate taxable income, if it is not available separately.

Divide the company's income tax liability by its taxable income. The result is the average tax rate for the company in the current year, which accounts for taxable income across all statutory tax rates.

Divide the same income tax liability figure by the company's net income. The result is the effective tax rate, expressed as a percentage. ETR measures taxable income as a portion of the difference between revenue and expenses.

Repeat the process for each company you are considering investing in. Lower ATR and ETR values indicate that corporate taxable income is less of a financial liability. While ATR should change based on the size of a company's revenue, ETR accounts for net income and provides an equal basis for comparing tax rates for companies of different sizes.

Tip

  • Use a computer spreadsheet program to perform automatic calculations and track taxable income for each company under consideration. This will reduce the risk of error, and allow you to see all of your data in one place as you move forward in the investment analysis process.

Warning

  • There is no formal requirement for businesses to reveal their corporate income tax liabilities, or the processes they use to account for them. Tax entries on a company's balance sheet generally refer to estimates or tax payments prior to applying certain tax shields. Unless you have access to corporate tax data, your calculations may not be accurate.

Items you will need

  • Corporate financial statements
  • Corporate tax records
  • Government tax tables
  • Computer spreadsheet program