The general effect of income taxes is to reduce net income by some percentage that is the tax rate. Income tax rules are very local by time and place. They therefore change and to apply them correctly requires a knowledge and interpretation of the rules that apply to each case. Some general techniques can be used to provide orders of magnitude effects that will indicate whether more detailed analysis is worth while.
It should be kept in mind when making comparisons it is the differences between alternatives that are important. This applies especially to changes due to income tax effects. The important tax rate is not the average but the one that applies to the margin or highest increment of income of a particular type.
E.g. A person may have an income of $70,000 per year and the average income tax rate may work out to 27%. However the rate on the upper increment may be as high as 55% when federal and provincial taxes a combined. An expenditure of $100 that is an allowable expense against taxable income will only reduce after tax income by $45 (100 - 55 tax). A similar $100 expenditure that is not an allowable expense will reduce after tax income by $100. The apparent cost to the person is $45 in the first case and $100 in the second case. This sort of difference is very important to an individual who is purchasing an airline ticket, or paying a telephone bill.
Because interest charges on personal mortgages are not allowable expenses in Canada and they are in the US there are important differences in the apparent cost of real-estate between the two countries. The apparent cost in Canada is much higher.
Most corporate expenses are deductible from gross income if
they contribute to the income. The general rule is that
taxable income will be gross income minus allowable expenses.
The after tax income will be the taxable income reduced by the sum of the
various taxes levied against taxable income. There are however different
tax considerations for income declared as dividends and other types.
The general rule is to consider that tax effects will reduce taxable income by the amount of the taxes.
The MYSYS function TAXABLE is similar to NOTAX, but includes rules & procedures for determining interest, depreciation expenses, amounts of taxes and after tax income.
TAXABLE follows the accounting practice of segregating the value flows into:
Ordinary Account, the variables that represent revenues &
expenses are:
R = receipts
D = disbursements
Capital Account that includes:
Reports are produced of flows before and after asset disposal, of cash flow and after tax income.
After tax flows can then be analyzed for P, F, A, or i similar to NOTAX and a condensed report as well as the tables of incomes and expenses.
TAXABLE assumes 'CAPITAL' & 'ORDINARY' account expenditures. One of them may be ignored by entering zeros. TAXABLE uses 'Canadian' income tax rules in defining expenses. TAXABLE does not include special tax provisions such as regional or industry incentives, etc which may be in effect.
It is assumed that tax is applied to TAXABLE INCOME (TI)which is computed as Revenue - Expenses. Net Revenues are initally in the C vector. Expenses are those allowed for Income Tax purposes.`
TXABLE eventually uses the NOTAX proceedure with a net cash flow vector C which recognize the effects of income taxes as negative income, the combined revenues and expenditures of the Capital and Ordinary accts. This is the CASH FLOW technique.
Disbursements are assumed to be in the ORDINARY account (ie such items as Operations and Maintence, supplies, etc.).
Expenses are computed from a combination of those allowed from the ORDINARY and the CAPITAL ACCOUNTS. These include interest and Capital Cost Allowance (CCA). CCA can be calulated by the decling ballance or straight line methods.
Other depreciation or CCA methods which may be locally applicable at not included directly but may be coputed externally and inserted in the CCA check.
Interest charges (I) on debt assume equal payment capital recovery for a specified period at a constant interest rate.
Lease payments assume no capital investment and are treated as allowable expenses for tax and net cash flow purposes.
Taxes are assumed to reduce income (or increase it if negative) to produce After Tax income (AT) which can be assigned to the C vector for further analysis.
End to date, ams 990818