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

What is the taxable amount?

The taxable amount is the sum on which the tax will be applied. Therefore, its purpose is to serve 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 base on an invoice would be the total amount, from which the 21%, 10%, or 4%% corresponding to VAT would be deducted, depending on the category and type of tax that applies to the good or service.

What is the taxable base?

The taxable base is the result of deducting the tax from the taxable base.. Thus, on an invoice where the VAT is 21% %, if the taxable base were 100 euros, the net base That would be 82.64 euros.

It's not just in the case of invoices that these figures can be discussed. The taxable base also exists for the purposes of Personal Income Tax. and a typical case would be the reduction to the taxable base that results from deducting the contribution made to a non-profit organisation, for example. On the Tax Agency's website there is a section specifically dedicated to income tax returns, where a Full information about the taxable base. This section of the official Tax Office website can be consulted Here.

It should be borne in mind that both reductions and deductions can be applied to the tax base, and they are not the same thing. Specifically, the former serve to reduce it based on the cost associated with income received; whereas the latter, deductions, relate to certain concepts associated with tax benefits.

How is the taxable base calculated?

In order to be able to correctly calculate the net base, In any case, it is necessary to know the taxable base. Furthermore, it is also necessary to know what taxes or reductions would apply to it.

Going back to the example in the previous lines, 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 the entrepreneur receives from that commercial transaction.

Also It may be that, in addition to deducting the VAT, the IRPF retention needs to be applied to this invoice. In this case, the calculations would be as follows:

1. The taxable base is added, plus 21%% of the taxable base minus the percentage corresponding to income tax withholding, which can be 15% or 7% for new self-employed individuals. The result should be equal to 100 euros, the total invoice amount in the example.
2. The formula is completed and, if we choose it to be the invoice of a new self-employed person, it would be as follows: taxable base + 0.21 * taxable base – 0.07 * taxable base = 100
3. Tax base *(1+0.21-0.07) = 100
4. We rearrange 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 occurs when there are no taxes to deduct or reductions to apply, and therefore, it is not synonymous with an error in the accounts.