What is Taxable Income Formula?
Taxable income formula is used to calculate the total income taxable under the income tax and for individual person formula is easy and is calculated by deducting the exemptions and deductions as allowed in income tax from the total income earned and for businesses it is calculated by deducting all the expenses and deductions from the total revenue and other income earned.
In simple terms, it refers to the amount of income earned by an individual or an organization that eventually creates a potential tax liability. The formula for taxable income for an individual is a very simple prima facie and calculation is done by subtracting all the expenses that are tax exempted and all the applicable deductions from the gross total income.
For Individual, it is represented as,
On the other hand, the calculation of the taxable income of a corporation is done by deducting the cost of goods sold, operating expenses and interest paid on debts from the gross sales of the company. Additionally, adjustment for a tax deduction or credit is done to arrive at the final income.
For Corporate, it is represented as,
Explanation
The taxable income formula for an individual can be derived by using the following four steps:
Step 1: Firstly, determine the gross total income of the individual. Gross total income includes all sources of income like wage/ salary, rental income from property, capital gains from the asset sale, income from other business interest etc.
Step 2: Next, determine the total exemptions availed by the individual. Different types of tax exemption may include charities, humanitarian aids, educational materials, etc. The list may vary depending on the reporting country.
Step 3: Next, determine the total deductions applicable to the individual’s income. Different types of tax deduction may include interest on a student loan, interest on the home loan, medical expense, etc. This list may also vary depending on the reporting country.
Step 4: Finally, the taxable income formula is calculated by total exemptions and total deductions from the gross total income of the individual as shown below.
Taxable Earning = Gross total income – Total exemptions – Total deductions
The taxable income formula for an organization can be derived by using the following five steps:
Step 1: Firstly, gross sales have to be confirmed by the sales department.
Step 2: Next, the cost of goods sold is determined by the accounts department.
Step 3: Next, the operating expense is also calculated from the accounts department.
Step 4: Next, the interest paid is calculated based on the rate of interest charged and the outstanding debt of the company.
Interest expense = Rate of interest * Debt
Step 5: Next, figure out all the tax deductions and credits applicable to the company.
Step 6: Finally, the calculation of taxable income equation is done by deducting the cost of goods sold, operating expenses and interest paid on debts from the gross sales of the company as shown below.
Taxable Earning = Gross sales – Cost of goods sold – Operating expense – Interest expense – Tax deduction/ credit
Examples of Taxable Income Formula (with Excel Template)
Let’s see some simple to advance example of Taxable Income Formula to understand it better.
Example #1
Let us take the example of David to understand the calculation for taxable income tax. He is entitled to a gross salary of $50,000 annually and he pays 6% interest on his son’s education loan of $25,000. He is also eligible for a tax exemption of $10,000.
Below is data for the calculation of David’s Taxable Earnings.
Therefore, David’s Taxable Income can be calculated as,
Taxable Earning = Gross salary – Interest on education loan – Tax exemptions
= $50,000 – 10% * $25,000 – $10,000
= $37,500
Therefore, David’s taxable Earning is $37,500.
Example #2
The table gives a snapshot of the detailed calculation of taxable income for the years 2016, 2017 and 2018. Let us take the real-life example of Apple Inc.’s annual report for the year 2016, 2017 and 2018. The following information is available:
The below table shows data for calculation of taxable earnings of Apple Inc.’s annual report for the year 2016, 2017 and 2018.
Taxable Income of Apple Inc.’s annual report for the year 2016 can be calculated as,
Taxable Earning= Net sales – Research and development expense – Selling, general and administrative expense – Interest expense + Non-operating income
= $215,639 – $131,376 – $10,045 – $14,194 – $1,456 + $2,804
Taxable Earnings = $61,372
Therefore, the taxable earning of Apple Inc. stood at $61,372 Mn for the year 2016.
Taxable Earning of Apple Inc.’s annual report for the year 2017 can be calculated as,
Taxable Earning = Net sales – Research and development expense – Selling, general and administrative expense – Interest expense + Non-operating income
= $229,234 – $141,048 – $11,581 – $15,261 – $2,323 + $5,068
= $64,089
Taxable Earning of Apple Inc.’s annual report for the year 2018 can be calculated as,
Taxable Earning = Net sales – Research and development expense – Selling, general and administrative expense – Interest expense + Non-operating income
= $265,595 – $163,756 – $14,236 – $16,705 – $3,240 + $5,245
= $72,903
Taxable Income Formula Calculator
You can use this Calculator
| Gross Total Income | |
| Total Exemptions | |
| Total Deductions | |
| Taxable Income Formula = | |
| Taxable Income Formula = | Gross Total Income - Total Exemptions - Total Deductions | |
| 0 - 0 - 0 = | 0 |
Relevance and Uses
For an individual, it is important to understand the concept of taxable income because it is more than just the salary earned at the job. Most often, if one receives any kind of compensation in any form, then it is likely to be considered under taxable income. Some of the uncommon examples of income that are included under taxable earning are debt liability that has been forgiven by the lender or creditor, lottery winnings, payments made for jury duty, gifts, unemployment benefits offered by the government, strike benefits, and even embezzled money.
The amount of taxes to be paid by an individual is lowered by tax credits, while the taxable earning of the individual is lowered by the tax deductions and exemptions. In the US accounting parlance, the items that qualify as “taxable income” are defined in the Internal Revenue Code Section 63, while the sources of income that can be identified as “gross income” are defined in Section 61 of the Internal Revenue Code.
For a company, taxable earning is the earning before taxation after all the business expenses have been recognized and the adjustments have been done. The understanding aids the preparation and filing of the business’ tax return.
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