What Is the Meaning & Difference Between Pretax Financial Income & Taxable Income?
Original post by Tom Gresham of Demand Media
"Pretax financial income" refers to income that is accumulated before income taxes are paid on it. "Taxable income" is the amount of income that is used in figuring the income tax that a person or business owes. Pretax financial income typically is used with businesses, and taxable income is used with both people and businesses.
Usage and Purpose
Taxable income is reported to the Internal Revenue Service for the purpose of paying income tax. Pretax financial income is used on official financial statements for the purpose of presenting an accurate portrayal of a company's finances to potential investors and others. Taxable income is determined using IRS tax code, and pretax financial income is determined through generally accepted accounting principles, according to the 1st Stock Investment website.
Some categories of income are always included in the totaling of either pretax financial income or taxable income but never included in the calculation of the other. These are called permanent differences because they always remain differences. An example of a permanent difference is the interest revenue on municipal bonds. This interest is not taxable income, but it is included in pretax financial income calculations, according to Investopedia.
"Temporary differences" refer to accounting items that will count in the calculations of either pretax income or taxable income during a particular year and not in the calculations of the other, if in a future year that accounting status will be reversed. So if such an item is counted in pretax income one year and not in taxable income, then on a future tax return it will count in taxable income and not pretax income.
Difference in Totals
The existence of permanent and temporary differences means that the totals for pretax financial income and taxable income tend to vary. When taxable income is higher than pretax financial income, then it means that tax obligations will be higher, and the reverse is true when taxable income is lower. This can create a particular impact with temporary differences when the tax impact of an item is deferred to a future tax period. In this case, the impact will be felt after the period in which that action occurred.
- Dexter Gulledge, Professor of Accounting, University of Arkansas at Monticello: Chapter 19 -- Answers to Questions
- Investopedia: CFA Level 1 -- Permanent vs. Temporary Items
- 1stStockInvestment.com: Pretax Financial Income
About the Author
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in the "Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.