Taxable income

The fiscal regime (or tax system) in some countries allows the cost of exploration and appraisal (E A) activity to be offset against existing income as a fiscal allowance before the taxable income is calculated. For a taxpaying company, the real cost of appraisal is therefore reduced, and this should be recognised in performing the cost-benefit calculations. 

Royalty is charged from the start of production, but tax is only payable once there is a positive taxable income. At the beginning of a new project the fiscal costs may exceed the revenues, giving rise to a negative taxable income. Whether the project can take advantage of this depends upon the fiscal status of the company and the project. 

It should be noted that a capital allowance Is not a cashflow item, but is only calculated to enable the taxable income to be determined. The treatment of capital allowance for this purpose is a petroleum economics approach, which may differ from the accountant s view of depreciation when calculating net book values and profit. 

Mfg cost (less depr and int) Capitalized fixed capital Capitalized total capital Operating income Interest on debt Depreciation (Tax basis) Net taxable income Federal income tax Investment tax credit Net income Cash flow... 

Inflationary Effects. Inflation can have a significant effect on the profitabiUty of a venture. However, the U.S. federal tax laws do not allow for indexing the inflationary effects on depreciation schedules, salvage values, replacement costs, or taxable income. Inflation rates can vary unpredictably with time and can differ for certain revenues of expenditures. 

In the first case, the annual taxable income is reduced by an annual depreciation charge or allowance which has the effect of reducing the annual amount or tax payable. The annual depreciation charge is merely a book transac tion and does not involve any expenditure of cash. The method of determining the annual depreciation charge must be agreed to by the appropriate tax authority. 

Year, n Net capital expendihire, Atc Revenue from sales, Total expenses. Ate Cash income, Aci Depreciation charge. Ad Taxable income, Aci - Ad) Amount of tax at t = 0.5, A,t Net cash flow, Acf Discount factor at i = 10%, f. Discounted net cash flow, Adcf Net present value (NPV)... 

Percentage depletion for most minerals is limited to a percentage of the taxable income from the property receiving the depletion allowance. For certain oil and gas producers the percentage depletion can be limited to a percentage of the taxpayer s net income from all sources. 

To compute taxable income, a taxpayer is permitted to subtract from revenues those expenses that are ncccssai y to create current sales. Expenses related to futnre sales are required to be capitalized and recovered over time. Distinctions between these two categories—current and suture sales—are sometimes hard to make, hi some cases the Tax Code permits energy producers to claim currently, or on an accelerated basis, expenditures that are related to future production and sales. This lowers income for current tax purposes, thereby increasing the after-tax return to investments in the energy sector compared to other investments. 

Taxpayers who receive incentive payments for installing energy-efficient equipment, such as a high-efficiency furnace, do not have to include the payment in their taxable income. This tax-favored treatment may make consumers more likely to purchase energy-saving equipment, thereby reducing demand for energy. 

The federal income tax on profits from corporations is based on income after all costs, including depreciation, have been deducted. Because depreciation affects taxable income, it is an important consideration in estimating profitability. The federal income tax rate for large corporations (profit greater than 75,000) was recently roughly 34-35 percent. State income taxes may push the total tax rate to about 40 percent. Therefore as an expense a depreciation amount of 1 reduces taxes about 0.40. At this level of taxation, the before-tax rate of return will be roughly 1.67 times the after-tax rate of return. 

Once an individual has established these plans, distribution provisions under these plans are restricted to the time at which they may commence. Distributions from an individual retirement account may not begin before an individual reaches age 59%. If distributions are made prior to that age, they are subject to a 10% premature distributions penalty in addition to being included in the individual s taxable income for that year. Furthermore, distributions may not be postponed beyond the taxable year in which the individual attains age 70%. So, in other words, between age 59% and 70% distributions may commence. Once distributions do occur, any amounts received under the plan are taxed as ordinary income includable in the individual s gross income for that year and are taxed at ordinary rates—no capital gains or special averaging is permitted. 

The analysis revealed that a large number of the inks used in the diaries were not available commercially until after the years in question, indicating the entries were backdated. The testimony was used as a rebuttal to impeach the testimony of the defendant and placed considerable doubt on the authenticity of the diaries. Thousands of dollars of taxable income were involved and the defendant became liable for the tax assessed by the Internal Revenue Service. 

The defendant claimed he was investing money for an anonymous rich client through land purchases which were supposed to have been made from 1958 through 1966. Over a half a million dollars of taxable income was involved. The government claimed the defendant was investing his own money and was using the rich client scheme to avoid paying the tax. 

Corporations are given a partial tax exemption for dividends received. In general, only 15 percent of such dividends are considered as taxable income for corporations, with the remaining 85 percent being tax exempt. 

Corporate contributions to appropriate organizations, as defined by the income-tax laws, can be deducted as an expense up to 10 percent of the taxable income figured without regard to the contribution deduction and other special deductions. Thus, for a corporation which is paying income tax at a 34 percent rate, a contribution of 10,000 would represent an actual cost to the corporation after taxes of only 6600. 

Year n Before-tax annual return based on zero-time dollars Actual dollars received at 7% inflation = 300,000 (1 + 0.07) Depreciation Taxable income Income tax at 34% After-tax annual cash flow ... 

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