# How To Find Percentage Of Tax Paid

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This article was co-authored by Gina D’Amore. Gina D’Amore is a financial accountant and the founder of Love’s Accounting. With 12 years of experience, Gina specializes in working with smaller companies in every area of ​​accounting, including economics and human resources. He has a Bachelor’s Degree in Economics from Manhattanville College and an Accounting Certificate from MiraCosta College.

## How To Find Percentage Of Tax Paid

There are 11 references mentioned in this article, which can be found at the bottom of the page.

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It is very important to know how much an item will cost before buying. It’s not as easy as just looking at the price; Sales tax must be calculated to determine the total cost. Sales tax rates are increasing, making the tax impact on a purchase more significant. Use these tips to learn how to calculate sales tax on your retail purchases.

This article was co-authored by Gina D’Amore. Gina D’Amore is a financial accountant and the founder of Love’s Accounting. With 12 years of experience, Gina specializes in working with smaller companies in every area of ​​accounting, including economics and human resources. He has a Bachelor’s Degree in Economics from Manhattanville College and an Accounting Certificate from MiraCosta College. This article has been viewed 2,022,437 times.

To find out the sales tax on an item, you need to know your local sales tax rate. You can easily find this information by searching online for the sales tax rate in your city and state. When you know the tax rate in your area, convert the sales tax rate from a percentage to a decimal by moving the decimal point two places to the left. Then multiply the resulting number by the list price of an item to find the sales tax on that item. So let’s say you buy something that costs \$27.95, with a local tax rate of 8%. You would multiply 27.95 by 0.08, giving you a sales tax amount of \$2.24. Add that amount to the price of the item to find your total cost including tax. In this case, the total would be \$30.19. But what if you already know the total cost of an item after tax, and you want to know the tax rate based on it? To do this, subtract the item’s list price from the total after tax. This will give you the amount of sales tax you paid. Then divide the tax amount by the list price. Move the decimal point in the resulting number 2 spaces to the right to get the tax rate as a percentage. For example, if the list price is \$72.50, and you paid \$75.05, then you paid \$2.55 in tax. 2.55 divided by 72.50 is 0.035, which means the tax rate is 3.5%. For more information on how to calculate sales tax, including some examples, scroll down! How to Forecast the Income StatementProfit and Loss (W&L) Gross Vs. Net IncomeGross SalesCredit SalesCost of Goods Sold (COGS)Cost of Goods Manufactured (COGM)Gross ProfitOperating ExpensesSG&AEBIT Expenses (Operating Review)Research and Development (R&D)COGS vs. Direct operating expenses vs. Indirect Costs Income Before Tax (EBT) Effective Tax Rate Effective vs. Marginal Tax Rates Interim Depreciation Tax Rates Net

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The effective tax rate represents the percentage of a corporation’s pre-tax income that is actually paid in the form of taxes.

The effective tax rate refers to the tax paid by a company and is equal to the tax paid divided by the income before tax.

Since there is a difference between the income before tax reported on financials as prepared according to accrual accounting standards and the taxable income reported on tax returns, the effective tax rate often differs from the marginal tax rate.

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The effective tax rate can be calculated for historical periods by dividing the tax paid by the income before tax, i.e. the earnings before tax (EBT).

Line items with taxes paid and income before tax can be found on the income statement, as shown in the image below.

The taxes paid by a company based on the accrual basis income statement rarely match the actual cash tax paid to the IRS.

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The effective tax rate is the percentage of tax paid by a company based on its pre-tax income, while the marginal tax rate is the rate charged on the last dollar of the income

The marginal tax rate is the percentage of tax applied to the last dollar of a company’s taxable income, taking into account the following factors:

The marginal tax rate adjusts according to the tax bracket below which the company’s profits fall, meaning that the tax rate changes as the company earns more (and moves into higher tax brackets).

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The incremental, “marginal” income is then taxed at the corresponding bracket, instead of every dollar of income being taxed at the same flat rate.

In almost all cases, there is a difference between the pre-tax income shown on the income statement and the taxable income as shown on the tax filing.

Therefore, effective and marginal tax rates are rarely equivalent, since the effective tax rate formula uses pretax income from the income statement, a financial statement that conforms to accrual accounting.

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Typically, the effective tax rate is lower than the marginal tax rate, since most firms are incentivized to defer paying the government.

In US GAAP reporting, most companies follow different accounting standards and rules for financial reporting versus tax reporting, as the following sections will explain in more detail.

A reason why the marginal and effective tax rate often differ is related to the concept of depreciation, the allocation of capital expenditure (CapEx) over the useful life of the fixed asset.

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Depreciation expense recorded for tax purposes in prior periods is greater than the amount recorded on GAAP income. But these tax differences are temporary differences in timing and the cumulative depreciation is the same at the end of the day.

Eventually an inflection point is reached in the assumption of the useful life of the asset where the depreciation recorded for tax purposes is lower than the amount declared in the books, meaning that the DTLs gradually reach zero.

Many companies incur significant losses in earlier years and receive tax credits that can be applied to subsequent periods once they are profitable, called the net operating loss (NOL).

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A profitable company can apply previously accumulated tax credits to reduce its amount of tax in current and future periods, creating a difference in tax in the book and tax accounting.

If a company’s debts or accounts receivable (A/R) are considered uncollectible – called “Bad Debt” and “Bad AR” respectively – deferred tax assets (DTA) are created, which cause differences in the rates.

The cancellation is recorded as a cancellation on the income statement; however, it is not deducted from the company’s tax returns.

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For a discounted cash flow (DCF) model, the decision to use the effective tax rate or the marginal tax rate comes down to the terminal value assumption.

That said, if a projection uses the effective tax rate, the implicit assumption is that the tax deferrals – that is, DTL and DTA – are expected to be a continuously recurring line, as opposed to zero with the time

Our recommendation is to assess a company’s effective tax rate over the past three to five years and then base the short-term tax rate assumption accordingly.

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The effective tax rate can be averaged if the tax rates are generally in the same range or following the directional trend.

Once the constant growth stage approaches, that is, the company’s operations are normalized, the assumption of the tax rate must converge to the marginal tax rate.

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