Corporate Income & Capital Tax Computations

Question 1

Explain the proforma to calculate CORPORATE TAX INCOME?

Answer 1

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

Question 2

Explain the ACCOUNTING PROFIT?

Answer 2

The profit before tax shown in the SOPL in the annual financial statements.

Question 3

Explain TAXABLE TRADING PROFIT?

Answer 3

Taxable trading profit will be charged at the appropriate tax rate for the accounting period.

Question 4

Explain INCOME EXEMPT FROM TAX OR TAXED UNDER OTHER RULES?

Answer 4

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

Question 5

Explain EBITDA?

Answer 5

A company’s Earnings Before Interest, Taxes, Depreciation and Amortization.

Question 6

Explain DISALLOWABLE EXPENSES?

Answer 6

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

Question 7

Explain ACCOUNTING DEPRECIATION?

Answer 7

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”.

Question 8

What is the difference between Accounting Depreciation & Tax Depreciation Allowance?

Answer 8

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.

Question 9

Explain TAX DEPRECIATION ALLOWANCE?

Answer 9

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.

Question 10

What is a BALANCING ALLOWANCE?

Answer 10

is tax loss on a disposal of an asset. Basically if you make a loss they give you an allowance.

Question 11

What is a BALANCING CHARGE?

Answer 11

= tax profit on a disposal of an asset. Basically if you make a profit they charge you.

Question 12

What should replace the ACCOUNTING AMOUNT?

Answer 12

The tax amount should replace the accounting amount so the taxable trading profit will then be charged at the appropriate tax rate.

Question 13

When an asset is sold any accounting PROFIT or LOSS must . . . .

Answer 13

be disallowed for tax purposes and REPLACED with the TAX equivalent known as a “Balancing Allowance/receive relief or Balancing Charge/pay tax”

Question 14

Why is it called a Balancing Allowance or Charge?

Answer 14

Because this is the LEFT OVER AMOUNT.

Question 15

How do we calculate the profit or loss when an asset is disposed of?

Answer 15

Proceeds
LESS:- Carrying amount (SOFP)
= Accounting Profit/Loss

DISALLOWABLE FOR TAX PURPOSES

Question 16

What does TWDV stand for?

Answer 16

Tax Written Down Value is similar to Carrying Amount which is Accounting and TWDV is Tax.

Question 17

What happens to Tax Depreciation Allowance in the year of disposal?

Answer 17

NOTHING as they are not given in the year of disposal, however it is replaced by Balance Allowance or Charge.

Question 18

What happens when an entity make a TRADING LOSS?

Answer 18

The assessment for that tax year will be nil.

Question 19

What must an entity claim if they make a trading loss?

Answer 19

The entity must claim LOSS RELIEF based on the rules of the country’s tax regime.

Question 20

What are the possible ways are there to relieve a loss?

Answer 20

• 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.

Question 21

What is Capital Taxes also known as?

Answer 21

Capital Gains Tax

Question 22

What are the common assets to be taxed on disposal?

Answer 22

• Listed stocks and shares;
• Property

Question 23

Can you explain the simple level of calculation for the sale of a capital asset?

Answer 23

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

Question 24

Can you explain the costs that can be deducted from the proceeds?

Answer 24

• 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

Question 25

What is INDEXATION ALLOWANCE claimed on?

Answer 25

Indexation Allowance can be claimed on the COST OF THE ASSET. Don’t forget its the TOTAL cost of the asset, including the purchase costs.

Question 26

What cannot be included in ENHANCEMENTS when calculating Capital Gains?

Answer 26

• you can include enhancements & improvements (extensions to an existing asset)
• HOWEVER you cannot use repairs to replace an existing structure as it is not allowable, example “Roof Repairs”

Question 27

CAPITAL LOSSES are kept separate from?

Answer 27

Trading activities.

Question 28

Can Capital Losses be off set against previous years Capital Gains?

Answer 28

No - only Trading Losses can be off set against previous years Trading Profits.

Question 29

Can you explain ROLLOVER RELIEF?

Answer 29

Rollover relief allows an entity to postpone paying TAX on a gain if it reinvests the same proceeds into a REPLACEMENT ASSET.

Question 30

Explain the meaning of Chargeable Gains & Capital Taxes?

Answer 30

CHARGEABLE GAINS are created when assets are sold at profit. The difference between proceeds and allowable costs.

CAPITAL TAXES represent the tax charged on the chargeable gains.

Question 31

Explain the meaning of INDEXATION ALLOWANCE?

Answer 31

• Is a relief given on the disposal of capital assets;
• The relief is based on the movement within the RPI (Retail Price Index) between the date costs were incurred on the asset and the disposal date;
• Represents relief for inflation
• The indexation allowance will reduce the AMOUNT OF GAIN for tax purposes.

Question 32

When an asset is sold any accounting profit or loss MUST BE DISALLOWED for tax purposes and replaced with what?

Answer 32

The TAX EQUIVALENT knows as the balancing allowance or charge.

Question 33

How do you calculate the Balancing Allowance on the loss of an asset?

Answer 33

Proceeds X
Less:- TWDV (tax written down value) (X)
= Balancing Allowance or Charge X

Question 34

Why is Ac Dep replaced by Tax Dep Allowance?

Answer 34

The ensure that STANDARD RATES of dep are used by all organisation for tax purposes.