How to Estimate Corporate Taxes

Estimating corporate taxes

It is not uncommon for analysts to estimate the amount a company will have to pay in taxes. This is done to create earnings forecasts, confirm valuations and determine the effectiveness of management. While corporations must pay the same tax rate for a given amount of income, there are ways to change the effective tax rate through tax credits and other income-based adjustments.

Things You'll Need

• Calculator or spreadsheet

Instructions

1. Download the annual report or financial statements of the company for which you want to estimate taxes. You can usually do this from the investor relations website of the company or from your favorite investment research site.

2. Go to the notes to the financial statement. This will be immediately following the financial statements. Specifically, you are interested in the notes to the income statement.

3. Look for the notes on income taxes. There will usually be a percentage rate as well as a cash amount. You are interested in the cash amount--these are the cash taxes actually paid, and the amount may differ materially from the amount listed on the income statement.

4. Divide the cash amount of taxes paid by the total sales for the year in which the taxes were paid. Multiply by 100 for a percentage. This is the percentage rate of cash taxes paid.

5. Multiply the sales estimate for the current year by the percentage rate of cash taxes paid in the previous year for your estimate.

References

• Philippine Institute for Development Studies: Development of Tax Forecasting Models: Corporate and Individual Income Taxes
• Oregon:Corporate Income Tax Forecast Methodology