After deducting interest payments and, depending on the business, other expenses, you are left with the profit a company made before paying its income tax bill. This figure 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, local, 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). Thus, 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. It would serve you well to memorize them:
This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.
Corporate Tax Rate Reference Table
|Corporate Income Tax Rates - 1998-2009|
|Taxable income over||Not over||Tax rate|