Net taxable income: what it is, how it is calculated and how it affects the business

The General Tax Law defines the concept of the net base, This is a figure that all entrepreneurs and the self-employed should be aware of if they want to be up to date with their tax obligations to the Treasury.

What is the tax base?

The tax base is the amount on which the tax is to be levied. It thus serves as the basis for calculating taxes. In the case of an invoice, it corresponds to the invoice total, before deductions and without deducting the corresponding tax charge.

An example of a taxable amount on an invoice would be the total amount, from which 21, 10 or 4% VAT would have to be deducted, depending on the category and type of tax on the good or service.

What is the net base?

The taxable base is the result of deducting the tax from the taxable base.. Thus, for an invoice with a VAT rate of 21 %, if the taxable amount were 100 euros, the net base 82.64 euros.

It is not only in the case of invoices that these figures can be mentioned. The net base also exists for personal income tax purposes. and a typical case would be the reduction to the taxable base that results after deducting the contribution given to a non-profit organisation, for example. On the Tax Agency's website, there is a special section dedicated to the income tax return, which publishes a full information on the tax base. This section of the official website of the Treasury can be consulted at here.

It should be borne in mind that both reductions and deductions can be applied to the tax base, which are not the same thing. Specifically, the former are in charge of reducing it according to the cost associated with the income received, while the latter, the deductions, are related to certain concepts associated with tax benefits.

How is the tax base calculated?

In order to be able to correctly calculate the net base, In any case, it is necessary to know the taxable amount. In addition, it is also necessary to know which taxes or reductions would be applicable to it.

Returning to the example above, the way to calculate it would be as follows:

1. Take the taxable amount, 100 euros.
2. Divide by 1.21 (since in this case the VAT applied was the general VAT rate of 21%).
3. Calculate the result: 82.64 euros, which corresponds to the net amount that the entrepreneur obtains for this commercial transaction.

Also It could happen that, in addition to the VAT deduction, the IRPF withholding tax has to be applied to this invoice. In this case, the calculations would look like this:

1. Add the taxable base, plus 21% of the taxable base minus the percentage corresponding to the IRPF withholding, which can be 15 or 7, for new self-employed. The result should be equal to 100 euros, the total of the invoice in the example.
2. The formula is completed and, if we choose that it is the invoice of a new self-employed person, it would be as follows: taxable income + 0.21*taxable income - 0.07 *taxable income = 100
3. Tax base *(1+0.21-0.07) = 100
4. We clear and obtain that the tax base * 1.14 = 100 and, therefore, the tax base would be equal to 87.72 euros.

It may be the case that the figure for the taxable base and the taxable amount coincide. This is the case when there are no taxes to be deducted or reductions to be applied and is therefore not synonymous with an error in the accounts.