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Business Finance · Personal and corporate taxation

Corporate Taxation and How to Calculate Taxable Profit

Updated 11 October 2026 · Fact-checked

A company pays tax on taxable profit, not accounting profit. Start with accounting profit, add back depreciation and disallowed expenses, deduct capital allowances and any exempt income, then set off tax losses. Multiply the result by the tax rate. Check when the tax is paid, because timing affects present values.

Understand Corporate Taxation and Taxable Profit

A company is a separate legal person. It pays tax on its own profits, and shareholders may then pay further tax on the dividends they receive. This is why tax appears in cash flows, in the cost of capital and in financing choices.

Accounting profit is measured under accounting rules. Taxable profit is measured under tax rules. The two differ because tax law has its own view of which income counts, which costs are deductible, and when.

The most common difference is depreciation. Accountants charge depreciation to spread the cost of an asset over its life. Tax law usually does not accept that charge. Instead it gives capital allowances (also called tax depreciation) at set rates. So you add back accounting depreciation and deduct the capital allowance.

Some expenses are disallowable, for example fines or certain entertainment costs. You add them back. Some income may be exempt or taxed differently, and you remove it from the calculation. Differences can be permanent (a disallowed expense never becomes deductible) or timing (depreciation versus allowances, which even out over the asset's life).

A tax loss arises when taxable profit is negative. Rules usually let the company carry the loss forward to reduce future taxable profit. Some systems also allow carry back. In exam questions, state the rule you assume. Tax is also often paid after the year end, so a delay of one year changes the present value of the tax cash flow.

Key rules to remember

Taxable profit
Taxable profit = Accounting profit + accounting depreciation + disallowable expenses − capital allowances − exempt income
Start from profit before tax. Use only the adjustments the question gives.
Tax payable
Tax payable = Taxable profit × tax rate
Apply the rate to taxable profit, never to accounting profit. If taxable profit is negative, tax payable is zero and a loss arises.
Reducing balance allowance
Allowance in year t = rate × tax written-down value at start of year t
Tax written-down value = cost − allowances already claimed.
Straight-line allowance
Annual allowance = (cost − residual value) ÷ number of years
Use only when the question says the allowance is straight line.
Tax saving from allowance
Tax saving = capital allowance × tax rate
Discount it from the date the tax is actually saved or paid.
Loss carried forward
Taxable profit after loss relief = profit before loss relief − loss brought forward (not below zero)
Any unused loss is carried forward again, if the rules allow.

How to solve Corporate Taxation and Taxable Profit questions

Use this order for any question on company tax. It keeps adjustments in the right direction and avoids mixing accounting and tax figures.

  1. 1Write down the tax rules given: tax rate, allowance rate and method, loss rules, and when tax is paid.
  2. 2Start with accounting profit before tax, as stated in the question.
  3. 3Add back accounting depreciation and any disallowable expenses.
  4. 4Deduct capital allowances calculated on the tax written-down value, and deduct any exempt income.
  5. 5Apply loss relief: deduct losses brought forward, or record a new loss if the result is negative.
  6. 6Multiply taxable profit by the tax rate to get tax payable.
  7. 7Place the tax in the correct year. If tax is paid a year late, discount it accordingly.
  8. 8Check the answer: taxable profit should differ from accounting profit only by the items you adjusted.

Quickest way: Adjustment table method

When to use it: Use this for multiple-choice questions and for the first marks of a written question, when you need a taxable profit or tax figure fast.

  1. Write one line: Profit + depreciation + disallowed − allowances − exempt income.
  2. Fill in the numbers and compute once.
  3. Multiply by the tax rate.
  4. For a tax shield on an asset, skip the full calculation and use allowance × tax rate for each year.
  5. Sanity check: taxable profit − accounting profit = depreciation + disallowable expenses − allowances − exempt income. Use that net figure to check your answer. If there are no other adjustments, allowances above depreciation give a taxable profit lower than accounting profit.

Common mistakes in Corporate Taxation and Taxable Profit

  • Deducting both accounting depreciation and capital allowances.

    Both look like depreciation, so students treat them as two deductions.

    Fix: Add back accounting depreciation first. Then deduct only the capital allowance.

  • Applying the tax rate to accounting profit.

    Accounting profit is the figure given at the top of the question.

    Fix: Always finish the adjustments to reach taxable profit before applying the rate.

  • Calculating reducing balance allowances on original cost every year.

    Students forget the base falls as allowances are claimed.

    Fix: Keep a running tax written-down value. Apply the rate to the opening balance each year.

  • Ignoring the timing of tax payment.

    Students focus on the amount and forget the date.

    Fix: Read when tax is paid. Discount the tax cash flow from that date, not from the profit year.

  • Letting taxable profit go negative and paying negative tax.

    The arithmetic gives a negative number, and students apply the rate anyway.

    Fix: Treat a negative result as a tax loss. Carry it forward under the stated rules and show tax payable as nil.

  • Adding back an item that should be deducted, such as exempt income.

    Students memorise add-backs and apply them to every adjustment.

    Fix: Ask whether the item was included in accounting profit and whether tax law taxes it. Add back disallowed costs. Remove exempt income.

Worked examples

Example 1

A company reports accounting profit before tax of ₹10,00,000 after charging depreciation of ₹2,00,000 and disallowable expenses of ₹50,000. Capital allowances for the year are ₹3,00,000. The tax rate is 25%. Calculate taxable profit and tax payable.

Show the solution
  1. Start with accounting profit: ₹10,00,000.
  2. Add back depreciation: ₹10,00,000 + ₹2,00,000 = ₹12,00,000.
  3. Add back disallowable expenses: ₹12,00,000 + ₹50,000 = ₹12,50,000.
  4. Deduct capital allowances: ₹12,50,000 − ₹3,00,000 = ₹9,50,000.
  5. Tax payable = 25% × ₹9,50,000 = ₹2,37,500.

Answer: Taxable profit is ₹9,50,000 and tax payable is ₹2,37,500.

Example 2

A company buys equipment for ₹8,00,000 at the start of year 1. Tax allowances are 25% reducing balance. The tax rate is 30%, and tax saved is received at the end of the same year. The company has enough taxable profit to use the allowances in full. Find the present value of the tax saved from the first two years of allowances at a discount rate of 10% a year.

Show the solution
  1. Year 1 allowance = 25% × ₹8,00,000 = ₹2,00,000.
  2. Tax written-down value after year 1 = ₹8,00,000 − ₹2,00,000 = ₹6,00,000.
  3. Year 2 allowance = 25% × ₹6,00,000 = ₹1,50,000.
  4. Tax saving year 1 = 30% × ₹2,00,000 = ₹60,000.
  5. Tax saving year 2 = 30% × ₹1,50,000 = ₹45,000.
  6. Present value = ₹60,000 ÷ 1.10 + ₹45,000 ÷ 1.10² = ₹54,545.45 + ₹37,190.08 = ₹91,735.53.

Answer: The present value of the tax saved over the first two years is about ₹91,736.

Exam tips

  • Write the adjustment line before any numbers. Examiners give marks for the method even if arithmetic slips.
  • Read the allowance method carefully. Reducing balance and straight line give different figures.
  • In investment appraisal questions, include the tax saving on allowances as a separate cash flow, and match its timing to the tax payment date.
  • State any assumption on losses, such as carry forward only, in one short line.
  • Do not apply tax to depreciation itself. Depreciation is non-cash and only matters through the add-back.

Practice questions from Personal and corporate taxation

Corporate Taxation and Taxable Profit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Corporate Taxation and Taxable Profit: frequently asked questions

Why is taxable profit different from accounting profit?

Accounting rules aim to show a fair view of performance. Tax rules aim to raise revenue under the law. They treat depreciation, some expenses and some income differently, so the figures differ.

What are capital allowances?

Capital allowances are the tax deductions for the cost of an asset. They replace accounting depreciation in the tax calculation. The rate and method are set by tax rules and given in the question.

What happens if a company makes a tax loss?

No tax is payable for that year. Under typical rules the loss is carried forward to reduce future taxable profits. Always follow the rule stated in the question.

Do I need to know the actual Indian corporate tax rate for the IAI exam?

The exam tests the principles, so questions normally give the tax rate and allowance rates. Focus on applying the given rules correctly and state your assumptions.