Tuesday, May 17, 2022

Corporate Income Tax System and Revenue on Goods and Services

A corporation includes associations, joint-stock companies, issuance
companies, and trust and partnerships that actually operate as
association or corporations.

Organizations of doctors, lawyers,
engineers and other professionals are generally recognized as
corporations. Such organizations have the following characteristics

  • associates organized to carry on business
  • gains from the business that is divided
  • continuity of life and centralized management
  • limited liability and free transferability of interest

Corporate Tax System 

Organizations possessing a majority of these characteristics must file
corporate tax returns. Income taxes are due from corporations and
businesses whenever revenue exceeds allowable tax deductions.

Revenues include sales to customers of goods and services, dividends
received on stocks, interest from loans and securities, rents, royalties
and other gains from ownership of capital or property.

Deductions embrace a wide range of expenses incurred in the
production of revenue: wages, salaries, rents, repairs, interest on the loan
taken, taxes, materials employee benefits, advertising etc.

Also deductible, sometimes under special provisions, are losses from fire,
theft, contribution, depreciation, depletion, research and development
expenditures and outlays to satisfy legislated objectives such as
pollution control.

The difference between revenue and deductions is taxable income:

The difference between revenue and deductions is taxable income. In
general,
Taxable income = Gross income – Expenses – interest on debt –
depreciations – other allowable decoctions.

The transfer from estimating cash flow before taxes (CFBT) to cash
flow after taxes (CFAT) involves consideration of significant tax
effects that may alter the final decision, as well as estimate the
the magnitude of the tax effect on cash flow over the life of the
alternative.

The after-tax cash flow is the net proceeds from an income-generating asset, after all, costs (taxes, mortgages, interest, maintenance costs etc.) of owning and operating the property.

Basic Income Tax System

Some basic tax terms and relationships are explained here.

Gross income (GI): It is the total income realized from all revenue-
producing sources of the corporation, plus any income from other sources such as the sale of assets, royalties, and license fees.

Income tax is the amount of taxes based on some form of income or
profit levied by the government. A large percentage of tax revenue is
based on the taxation of corporate and personal income. Taxes are
actual cash flows.

Operating expenses (E): It includes all corporate costs incurred in the
transaction of business. These expenses are tax-deductible for
corporations.

For engineering economy alternatives, these are the AOC
(annual operating cost) and M&O (maintenance and operating) costs.
Taxable income (TI) is the amount upon which income taxes are
based.

For corporations, depreciation D and operating expenses (E) are
tax-deductible.

Taxable income(TI) = Gross Income(GI) – Operating Expenses (O) –
Depreciation (D)

TI = GI – E – D

Tax rate (T) is a percentage, or decimal equivalent, of TI, owed in taxes.

The tax rate is graduated; that is, higher rates apply as TI increases.

Taxes = (Taxable Income) * (Applicable Tax Rate)
Taxes = (TI) * (T)

The transfer from estimating cash flow before taxes (CFBT) to cash
flow after taxes (CFAT) involves consideration of significant tax
effects that may alter the final decision, as well as estimate the
the magnitude of the tax effect on cash flow over the life of the
alternative.

Mutually exclusive alternative comparisons using after-tax
PW, AW, and ROR methods are explained with major tax implications
considered.

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