More of this Feature • Introduction • Income Statement • Revenue / sales • Cost of Goods Sold • Gross profit • Gross margin • The first three lines • Operating Expenses • R&D Expense • SG&A Expense • Goodwill Charges • Extraordinary Events • Accounting for extraordinary events • Oper. income/margin • Interest income and expense • Interest coverage ratio • Depreciation expense • Accum. Depreciation • Straight-line Method • Accelerated and Sum of the Years' Digits Method • Dbl Declining Balance • Comparing Depr. Mths • EBITDA • Income taxes • Minority Interests - cost, equity, and consolidated methods • Unreported earnings • Continuing operations • Accounting changes • Preferred dividends • Net income applicable to common shares • Net profit margin • Basic vs. Diluted EPS • Hiding share dilution • Share repurchases • Return on Equity- ROE • Asset turnover • Return on Assets- ROA • Projecting earnings • Formulas & Calculations • Putting it together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

From Other Guides • About Taxes • Canadian Small Business Tax Information

Elsewhere on the Web • Corporate and Personal Income Tax Rates • Corporate Tax Rates by State

Income before Tax
After deducting interest payments and [depending on the business] other expenses, the analyst / investor is left with the profit a company made before paying its income tax bill. It allows you to see what the business would have earned if it did not have to pay taxes to the government.

Income Tax Expense
The income tax expense is the total amount the company paid in taxes. This figure is frequently broken out by source [federal, state, etc.] either on the income statement or somewhere in the annual report or 10k.

You should be fairly familiar with the tax laws affecting specific companies and / or business transactions. For instance, say the business you were analyzing just purchased $100 million worth of preferred stock that was paying a 9% yield [we'll talk more about preferred stock later]. You could rightly assume the company would receive $9 million a year in dividends on the preferred. If the company had a tax rate of, say, 35%, you may assume that $3.15 million of these dividends are going to be paid to the Uncle Sam. In truth, corporations get an exemption on 70% of the dividends they receive from preferred stock [individuals do not enjoy this luxury]. Hence, only $2.7 million of the $9 million in dividends would be subject to taxation. Don't you love this stuff?

For your reference, here is a list of the corporate tax brackets from smbiz.com. It would serve you well to memorize them:

Corporate Income Tax Rates--2002, 2001, 2000, 1999, & 1998

  Taxable income over     Not over      Tax rate
    $         0        $    50,000        15%
         50,000             75,000        25%
         75,000            100,000        34%
        100,000            335,000        39%
        335,000         10,000,000        34%
     10,000,000         15,000,000        35%
     15,000,000         18,333,333        38%
     18,333,333         ..........        35%

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