How to Calculate Taxable Income Using an Income Statement
Businesses, particularly publicly traded ones, use income statements as part of balance sheets to report their periodic income to board officers and, in some cases, investors. Income statements are meant to report a company’s financial stability and provide a snapshot of its fiduciary responsibilities and income streams and doesn’t usually serve as a tax document. Because taxes may be deferred on income and some types of income are permanently non-taxable – such as interest payments from mutual funds – financial income reported on an income statement and taxable income are different measures. An investor can use income reported on a balance sheet to estimate a company’s tax bill, though it shouldn’t be used as a basis for filing income taxes.
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Instructions
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1
Locate the line for income tax expense on the income statement. This lists the company’s total tax liability for the year before any deductions were made.
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2
Locate the line for deferred income taxes for the year. This represents the portion of taxes deferred to future tax years. Deduct this amount from the total tax liability.
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3
Locate the figure for deferred tax assets. This figure represents taxes deferred in prior years that are now due on this year’s tax bill. Add this figure to the total calculated in Step 3. This is the total tax due for the corporation for the reporting period.
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Tips & Warnings
Do not use the income statement’s report of financial income as a basis for income tax calculations. Financial income represents the amount of money the company generated in a reporting period. Because this income may be non-taxable, or be subject to deferred taxation, this figure may not represent taxable income for the year.
