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Net of Tax is a financial accounting convention that presents an item’s value with tax already deducted. It is generally considered unacceptable, but can be used for one-time occurrences or to show a profit or loss. It is also used in the salaries of employees assigned to foreign countries.
Net of Tax is a financial accounting convention and term that presents the value of an item as an amount with the tax assessment on it already deducted. Basically, it is the value of the item after taxes have been deducted. Instead of explaining the discrepancy, the item’s value is listed as net of tax, which informs the reader of the underlying calculation.
Financial accounting conventions differ from country to country. Within jurisdictions, accounting practices are structured to be uniform. Uniformity allows investors to assess a company’s financial condition based on financial statements that use the same underlying conventions and calculations. An accounting convention that is in use in many jurisdictions, such as the United States, is the concept of presenting an amount in financial statements as net of tax.
Tax liability with respect to something a business owns or does is usually listed as a separate category under expenses. This allows a person reviewing the company’s operations to know exactly where the money has gone with the specificity needed to assess the particular effect of the item on the company’s bottom line. If an analyst wants to determine where a company can cut expenses, she can evaluate the tax liability account to see if it seems unnecessarily high and should be a candidate for cost savings with a change in operations.
However, if an item is presented in the financial statements as net of tax, the tax account is artificially deflated. Taxes paid are not shown in the books. Instead, it is noted that the tax attached to a specific item is not included on the statements, as it would normally be a regular expense.
Net of tax reporting is generally referred to as an unacceptable accounting practice by many accounting standards organizations. The practice is generally reserved for certain cases where the effect of the tax is a one-time occurrence or is likely to unrealistically bias the financial statements in one year. For example, a net-of-tax calculation can be used to show an extraordinary profit or loss on an income statement or a one-time revenue inflow from a business division that has been sold.
The concept of net of taxes is also used in the salaries of employees assigned to foreign countries. Businesses that establish operations abroad and assign non-citizen employees to the location may pay an employee a salary that is quoted net of tax. This means that the amount quoted as salary is the amount the employee will receive in hand, and the company will pay any taxes assessed by the host country.
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