Tax Accounting I

1. Tax Accounting I • Chapter 6 Tax on Commercial and industrial profit (C&IPs) Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems

2. Considerations of C&IPs • When determining the (C&IPs) the following considerations should be observed: • Income source: C&IPs are derived from the self utilization of both work and capital in the pursuit of gain. • Taxable firms: the tax is imposed on the income which is gained by individuals and sole- Company. • Taxable period: taxable income is usually computed on the basis of an annual accounting period commonly known as a taxable period.

3. General tax model To determine the tax net profit, the taxable revenues are matched with the related allowable deductions (expenses), under the tax statute, incurred for obtaining these revenues. So ,tax examiner can measure the tax net profit by taking the net profit shown in the income statement and adds back all those deductions which are not allowed by the tax statute and deducts such items that are not taxable by the tax statute.

4. The general model of measurement the tax net profit

5. First: The taxable revenues: 1- The tax treatment of operating revenues. Operating revenues are increases in O.E resulting from business main activities. Accountants define gross profit as the amount of sales minus the cost of goods sold. Gross profit = sales revenue – cost of goods sold The tax treatments of the factors of the above equation are explained under the following titles:

6. First: The taxable revenues: A- Tax treatment of sales revenue: Sales are the principal source of operating revenues. An understatement of sales in a year causes understatement of taxable net profit in that year. You must consider the following points related to sales items: The Revenue Recognition Principle,revenues should be recorded when service is performed or when goods are sold to customers regardless of when cash is received.

7. the taxable revenues and allowable deductions. First: The taxable revenues: We will discuss the following issues: • The tax treatment of operating revenues. • The tax treatment of incidental revenues. • The tax treatment of capital gains.

8. First: The taxable revenues: • The following points are worth mentioning in this respect: • The withdrawals of goods by the owner for his personal use are recorded at the cost of the goods which were withdrawn as this transaction does not derive real profit. • The delivery of goods to local branchesor selling agencies does not also derive real profit because these profits are not realized until the goods sold. • When goods are exchanged for a fixed asset, it is deemed a sales transaction. The price of sales represents the fair value of the received fixed assets.

9. Example(1): The net profit of "Adham" sole-company for the year ended December 31, 2012 was L.E. 75,000. The tax examination revealed the following information: • There ware sales amount of L.E.20, 000 which were not recorded at all. The cost of these sales was L.E. 15,000. • The firm delivered goods with a cost of L.E. 30,000 to one of its local branches. These goods were recorded as sales, at a price L.E. 40,000 . 25% of these goods are not sold. • The firm traded- in goods for land. The land market value is L.E.24,000. the goods were recorded as sales amount of L.E. 20,000. • The owner withdrew goods for his personal use. This transaction was not recorded. The cost of these goods is L.E.3,000 while its sticker price is L.E.3,500. Required: • Make the necessary adjustments to measure the taxable net profit of the firm for the taxable period 2012.

11. First: The taxable revenues: • Second: • The tax treatment of incidental revenues: • These revenues are considered to be outside the scope of the basic activities of the firm. Incidental revenues include: • Subsidy:they are sums received by the taxpayer from government or any party to achieve economic or social objectives. • Cash subsidies are taxable on a cash basis. • If the subsidy is in a form other than cash (property or services), the market value of subsidy is subject to tax.

12. First: The taxable revenues: • 2- Bad debts recovered: • sometimes accounts that have been written off as non- collectable (bad debts) are collected (bad debts recovered) at a later date. The following rules may be noted for the purpose of tax treatment: • - If the bad debts were allowable as deduction in determining the tax net profit for the previous year, they would be included in the taxable revenues for the year in which they are received. • If the bad debts were not allowable as deduction in determining the tax net profit for the previous year, they would not be included in the taxable revenues for the year in which they are received.

13. First: The taxable revenues: • 3- Compensations: • they are sum received for damages suffered by the taxpayer. compensations include: • A- Insurance compensations related to current assets (insurance policies that cover the loss may occur because of unexpected events such as fire). The amount of insurance compensation should included in the tax profit regardless whether the firm replaces this asset by purchasing other assets or not. • B- Insurance compensations related to fixed assets.The excess of insurance compensation over the book value of these assets (capital gain) should included in the tax profit.

14. First: The taxable revenues: 4- Interest revenuesderived from some transaction with customers such as interest of credit sales are includable in the tax profit.

15. Example (2): • The net profit of "Nouran" sole-company for the year ended December 31, 2012 was L.E. 105,000. The tax examination revealed the following information: • 1- The income statement includes the following items: • a- L.E. 10,000 subsidy received from ministry of health to support the firm's hospital. This amount includes L.E.3,000 received in cash and the remainder is a medical devices, its fair market is L.E. 8,000 • b- L.E.5,500 bad debts recovered including L.E. 3,500 was earlier allowed as deduction and the rest was not allowed. • 2- The following item was not recorded in the accounting books during the year: • - L.E. 15,000 compensation received from an insurance company for goods which were damaged by fire, the total amount of compensation was used to purchase other goods. • Required: • Make the necessary adjustments to measure the taxable net profit of the firm for the taxable period 2012.

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