Net Income Tax Liability and Its Implications
Net income can be defined more understandably as the company’s or individuals’ total earnings for a certain period. For a company, net income can be found in its income statement and is a vital information to measure how it is profitable over a period. It is also an important factor to consider in calculating the company's earnings per share. Net income tax liability is calculated using a percentage approved by the law of a particular place and is expected to be paid at once.
Where Our Taxes Go
Income tax liability is generally paid to the state or country where an individual is residing or where a company is holding business. The fund generated from the collection of taxes is then used to finance government activities and projects and to run the country or the state in general. There are government projects that need capital expenditures and this is where our taxes go. A well developed country or state hugely depends on the remittances of an individual or corporation’s net income tax liability. Taxes are so important for the government, which is why strict compliance on its payment is strongly adhered. There are certain laws that impose penalty charges to those who fail to pay their taxes. These penalties can range from merely adding up surcharges to the tax payable to as grave as imprisonment, all depending on the existing tax law of the land.
How to Determine Tax Liability
Income tax is commonly computed as a percentage of the income earned for the period. The percentage used for the computation depends mostly on the tax law of the place and the type of income earned that needs to be taxed, since there are instances that there are no tax imposed at all. There are other places where the income system implemented allows offsetting of loss to profits of another. For instance, if a taxpayer suffers loss from the stock market, the loss may be deducted from the income earned in his profession or business. There are two common forms of net income tax liability computation:
- Based on a progressive rate where income tax are payable differently depending on the amount of income earned by a person on a certain period.
- Based on a flat rate where all income are treated uniformly, whatever the type of earnings are.
What Deferred Income Tax Liability Means
Tax liability is the total amount that an individual or a company is obligated to pay legally resulting from the computation of the total income earned for a taxable period. Net income tax liability is calculated by multiplying the tax rate with the taxable income, which may then include the annual income, inheritance received, or the sale of capital assets.
Taxes on net income that have already been recognized and recorded for accounting purposes although not for the purpose of federal income tax is what deferred income tax liability means. The position of the books of account of a particular company will show that income exceeds the taxable income, and tax expense would be greater than the tax payable.
Deferred income tax liability can rise from the differences between the expenses recorded in the corporate group from that of the tax book, and the most common difference comes from the depreciation expense. It can be due to the manner of computing the depreciation of an asset, which may differ in the two books. If this happens, higher depreciation expense in the past that resulted to a lower net income tax liability should be taken into account by recognizing it as delayed payment, thus the deferred income tax liability.