Assessable Profit vs Taxable Profit: Difference and Comparison

Assessable profit refers to the income calculated according to tax laws, adjusted for certain deductions or exemptions, and serves as the basis for determining tax liability. Taxable profit, on the other hand, is the portion of assessable profit subject to taxation after applying applicable rates and deductions, resulting in the final amount of tax owed to the government.

Key Takeaways

1. Assessable profit is a business’s gross income, subject to tax assessment; taxable profit is the net income after allowable deductions and exemptions are applied.
2. Assessable profit is calculated before considering tax deductions, while taxable profit is determined after accounting for deductions and exemptions.
3. Taxable profit is the final amount tax liability is calculated, ensuring businesses pay taxes only on income after allowable deductions.

Assessable Profit vs Taxable Profit

Assessable profit refers to the amount of profit earned by a business or individual that is subject to taxation by the relevant tax authority. Taxable profit refers to the profit earned by a business that is subject to tax after taking into account any allowable deductions or exemptions.

Assessable profits, as the name suggests, are the profits for which taxes have to be paid as per law or the profits that, when obtained by an individual, have to pay taxes to the government.

The government decides the stakes of paying tax for assessable profits, and it varies in different fields.

Taxable profit is the amount an individual or an institution must pay the government when a certain amount of income is obtained. A part of the income has to be paid as tax to the government for the smooth running of the government and the country.

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Comparison Table

Feature	Assessable Profit	Taxable Profit
Definition	The profit of a business after deducting all allowable business expenses.	The assessable profit after taking into account any tax deductions or offsets.
Calculation	Total revenue – Total allowable business expenses	Assessable profit +/-(Tax deductions/offsets)
Purpose	Used to determine the starting point for calculating income tax a business owes.	Used to determine the final amount of income tax a business owes.
Tax implications	Tax is payable on the assessable profit at the applicable tax rate, before considering tax deductions/offsets.	Tax is payable on the taxable profit at the applicable tax rate.

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What is Assessable Profit?

Definition:

Assessable profit, also known as assessable income, refers to the total income earned by an individual or business entity that is subject to assessment or evaluation by tax authorities for the purpose of determining tax liability. It serves as the starting point in the tax calculation process, forming the basis upon which taxable income is derived.

Components:

1. Gross Income: Assessable profit encompasses all sources of income received by an individual or business, including wages, salaries, rental income, dividends, interest, capital gains, and any other form of earnings.
2. Adjustments: Certain adjustments may be made to the gross income to arrive at the assessable profit. These adjustments include deductions, allowances, exemptions, and credits permitted by tax laws or regulations. Common adjustments include expenses incurred in earning income, depreciation on assets, and contributions to retirement accounts.

Determination:

1. Tax Laws and Regulations: Assessable profit is determined in accordance with the tax laws and regulations applicable to the jurisdiction in which the individual or business operates. These laws vary from country to country and may change over time, impacting the calculation of assessable profit.
2. Taxable vs. Non-Taxable Income: Not all income is necessarily assessable for tax purposes. Some types of income may be exempt from taxation or subject to special treatment under the tax code. Examples of non-taxable income include gifts, inheritances, certain insurance proceeds, and certain types of government benefits.

Importance:

1. Basis for Taxation: Assessable profit forms the foundation for calculating the tax liability of individuals and businesses. It provides tax authorities with a comprehensive view of an entity’s financial position and income-generating activities, enabling them to determine the appropriate amount of tax owed.
2. Compliance and Reporting: Accurate determination and reporting of assessable profit are essential for complying with tax laws and regulations. Failure to accurately report assessable income or attempts to evade taxes can result in penalties, fines, and legal consequences.

 

What is Taxable Profit?

Definition:

Taxable profit refers to the portion of an entity’s assessable income that is subject to taxation after accounting for allowable deductions, exemptions, and credits as per the tax laws and regulations applicable to the jurisdiction. It represents the income on which taxes are calculated and paid to the government.

Calculation:

1. Assessable Income: Taxable profit begins with the assessable income of an individual or business entity, which includes all sources of income subject to taxation, such as wages, salaries, business profits, rental income, capital gains, and dividends.
2. Deductions and Allowances: From the assessable income, certain deductions, allowances, and exemptions permitted by tax laws are subtracted to arrive at the taxable profit. These deductions may include business expenses, depreciation on assets, interest payments, charitable contributions, and other eligible expenses that reduce the taxable income.

Determination:

1. Tax Rates and Thresholds: Once the taxable profit is determined, it is subjected to the applicable tax rates and thresholds specified in the tax laws of the jurisdiction. Different types of income may be taxed at varying rates, and tax brackets may exist where different rates apply to different income levels.
2. Tax Credits: Tax credits may also be applied to reduce the amount of tax payable on the taxable profit. Tax credits are incentives provided by governments to encourage certain behaviors or activities, such as investment in renewable energy, education expenses, or research and development initiatives.

Importance:

1. Revenue Generation: Taxable profit is a significant source of revenue for governments, as it represents the income on which taxes are levied. The taxation of taxable profit contributes to funding public services, infrastructure development, and various government initiatives.
2. Fairness and Equity: Taxable profit ensures fairness and equity in the tax system by subjecting individuals and businesses to taxation based on their ability to pay. By applying tax rates and deductions, the tax burden is distributed in a manner that reflects taxpayers’ financial circumstances and contributions to society.

Compliance and Reporting:

1. Tax Return Filing: Taxable profit must be accurately reported by individuals and businesses on their tax returns, along with supporting documentation and disclosures of deductions, allowances, and credits claimed. Failure to report taxable income correctly can lead to penalties, fines, and legal consequences.
2. Tax Planning: Effective tax planning involves strategies to minimize taxable profit within the bounds of the law through prudent financial management, timing of transactions, and utilization of available deductions and credits. Proper tax planning helps individuals and businesses optimize their tax position and reduce their overall tax liability.

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Main Differences Between Assessable Profit and Taxable Profit

1. Assessable Profit:
   • Represents total income earned by an individual or business.
   • Serves as the starting point for tax calculation.
   • Comprises all sources of income before deductions and exemptions.
2. Taxable Profit:
   • Refers to the portion of assessable profit subject to taxation.
   • Calculated after applying allowable deductions, exemptions, and credits.
   • Represents the income on which taxes are actually levied and paid.
3. Adjustments:
   • Assessable profit may require adjustments for certain expenses, but taxable profit reflects these deductions in its calculation.
4. Tax Treatment:
   • Assessable profit is subject to assessment by tax authorities.
   • Taxable profit is the income amount actually taxed based on applicable rates and allowances.
5. Reporting:
   • Assessable profit is reported initially before deductions and exemptions.
   • Taxable profit is reported after applying deductions and exemptions, representing the final taxable income.
6. Importance:
   • Assessable profit serves as a comprehensive view of income.
   • Taxable profit determines the actual tax liability and revenue generation for governments.
7. Compliance:
   • Accuracy in reporting assessable profit is crucial for complying with tax laws.
   • Accurate reporting of taxable profit ensures compliance and minimizes the risk of penalties or fines.

References

1. https://icidr.org/ijalsg_vol4no2_august2013/Taxation%20of%20Petroleum%20Profit%20under%20the%20Nigerias%20Petroleum%20Profit%20Tax%20Act.pdf
2. https://doc1.bibliothek.li/acb/FLMF040940.pdf