Ch 2 - Corporate Income & Capital Tax Computations Flashcards
Explain the proforma to calculate CORPORATE TAX INCOME?
Accounting profit
LESS :- income exempt from tax or taxed under other rules
ADD :- disallowable expenses
ADD :- accounting depreciation
LESS :- tax depreciation allowance
Taxable trading profit
Explain the ACCOUNTING PROFIT?
The profit before tax shown in the SOPL in the annual financial statements.
Explain TAXABLE TRADING PROFIT?
Taxable trading profit will be charged at the appropriate tax rate for the accounting period.
Explain INCOME EXEMPT FROM TAX OR TAXED UNDER OTHER RULES?
Income included in the accounting profit which does NOT relate to the main trading activity i.e. rental income, dividend income, interest receivable - which may be taxed under other rules. DEDUCT
Explain EBITDA?
A company’s Earnings Before Interest, Taxes, Depreciation and Amortization.
Explain DISALLOWABLE EXPENSES?
These are expenses that have been deducted from the accounting profit HOWEVER for tax purposes can’t be claimed. i.e. in the UK entertaining customers, gift aid payments and political donations. ADD BACK
Explain ACCOUNTING DEPRECIATION?
Depreciation is an accounting entry that is NOT allowed for tax purposes because it is too subjective. ADD BACK - this is replaced by “Tax Depreciation Allowance”.
What is the difference between Accounting Depreciation & Tax Depreciation Allowance?
The main difference is the PURPOSE for which they are used. Accounting dep is used for financial reporting purposes, while tax depreciation is used to reduce the amount of taxes that a company or individual has to pay.
Explain TAX DEPRECIATION ALLOWANCE?
This may be also be called CAPITAL ALLOWANCE. And is possibly used as an incentive to encourage new investment. Is often given on a reducing balance basis. A full years tax depreciation allowance is given if the asset is owned at the accounting date, regardless of when it was purchased. NO TIME apportionment for mid-year acquisitions.
What is a BALANCING ALLOWANCE?
is tax loss on a disposal of an asset. Basically if you make a loss they give you an allowance.
What is a BALANCING CHARGE?
= tax profit on a disposal of an asset. Basically if you make a profit they charge you.
What should replace the ACCOUNTING AMOUNT?
The tax amount should replace the accounting amount so the taxable trading profit will then be charged at the appropriate tax rate.
When an asset is sold any accounting PROFIT or LOSS must . . . .
be disallowed for tax purposes and REPLACED with the TAX equivalent known as a “Balancing Allowance/receive relief or Balancing Charge/pay tax”
Why is it called a Balancing Allowance or Charge?
Because this is the LEFT OVER AMOUNT.
How do we calculate the profit or loss when an asset is disposed of?
Proceeds
LESS:- Carrying amount (SOFP)
= Accounting Profit/Loss
DISALLOWABLE FOR TAX PURPOSES
What does TWDV stand for?
Tax Written Down Value is similar to Carrying Amount which is Accounting and TWDV is Tax.
What happens to Tax Depreciation Allowance in the year of disposal?
NOTHING as they are not given in the year of disposal, however it is replaced by Balance Allowance or Charge.
What happens when an entity make a TRADING LOSS?
The assessment for that tax year will be nil.
What must an entity claim if they make a trading loss?
The entity must claim LOSS RELIEF based on the rules of the country’s tax regime.
What are the possible ways are there to relieve a loss?
- carry losses forwards against future profits of the SAME trade
- carry losses backwards against previous periods
- offset losses against group company profits
- offset losses against capital gains in the same period.
What is Capital Taxes also known as?
Capital Gains Tax
What are the common assets to be taxed on disposal?
- Listed stocks and shares;
- Property
Can you explain the simple level of calculation for the sale of a capital asset?
Proceeds
LESS:- costs to sell the asset
Net proceeds
LESS:- cost of original purchase cost of asset
LESS:- costs incurred to purchase the asset
LESS:- enhancement costs of the asset
LESS:- indexation allowance
Chargeable Gain
Can you explain the costs that can be deducted from the proceeds?
- original purchase cost of the asset
- costs incurred to buy the assets, i.e. legal fees, estate agent fees
- costs incurred to sell the asset, i.e. legal fees, estate agent fees
- enhancement / improvement costs of the asset, i.e. extensions to an existing asset
- indexation allowance - if this exists in the country of residence of the asset being disposed
