What is a Tax Profit?

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  • Written By: Ron Davis
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 02 May 2020
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A tax profit, also known as a taxable profit, is a profit that is subject to taxation. The other types of profits usually discussed are accounting profits, also known as earnings, and after-tax profits. After-tax profits equal taxable profits less the amount of the taxes paid.

The individual’s tax profit include his wages, salary, or business income less all his deductions, and it is on this combined amount he actually pays taxes. Individuals have their tax profit reduced by items such as depreciation on rental property, unusually high medical expenses, out of pocket costs for moving for reasons of employment, business related education, and other itemized deductions. If an individual wants to obtain a mortgage or other credit, his wages or salary would be the primary consideration and not his taxable income.

Where public corporations are concerned, the main focus is on accounting profits, the corporate equivalent of wages or salary. Corporate earnings, usually expressed as earnings per share, is the yardstick by which analysts compare annual corporate performance. Deductions that reduce a corporation’s tax profit include special tax code provisions that provide a tax benefit to the corporation, extraordinary or one-time costs that accounting standards do not require the company to deduct from its stated income, depreciation on machinery, equipment, or real estate, and assorted other accounting and/or tax code provisions that may be peculiar to that company. This is in accord with professional accounting standards, which try to present corporate balance sheets in a uniform manner so that share holders can easily compare one company with another.

Corporate management can find itself in a paradoxical situation driven by the market's focus on both quarterly earnings reports and its own annual bonuses. The logical, long term approach for management to take is to minimize taxes paid in order to reinvest the money in the business. Corporate executives sometimes intentionally obscure pre-tax poor results in order to satisfy shareholders, maintain share prices, and increase their own bonuses, even though it may result in the company paying much more tax than it needs to pay.

Individuals normally do not intentionally pay more taxes than they need to. They often attempt to keep their taxable income as low as lawfully possible to reach that goal. Some high income taxpayers have been known to move from their native land to countries like Monaco, Switzerland, or Luxembourg in order to reduce their tax burden.


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