Business pay income taxes based on. accounting profits, economic profits, inflation adjusted profits, or revenues
The correct answer and explanation is:
The correct answer is accounting profits.
Explanation:
Businesses pay income taxes based on their accounting profits, not economic profits, inflation-adjusted profits, or revenues. Accounting profits are calculated by subtracting the explicit costs of production (like wages, rent, and materials) from total revenue, according to Generally Accepted Accounting Principles (GAAP). These profits are the ones that are reported on a company’s financial statements and serve as the basis for taxation purposes.
Economic profits, on the other hand, account for both explicit and implicit costs. Implicit costs refer to the opportunity costs of using resources in a specific way (e.g., the income a business owner could have earned elsewhere). Economic profits provide a broader picture of a company’s performance but are not used for tax purposes. They are more relevant to economists than tax authorities.
Inflation-adjusted profits refer to the profits that account for changes in the value of money over time due to inflation. While inflation-adjusted figures may be important for understanding long-term trends in an economy, businesses do not pay taxes based on these adjusted profits.
Revenues represent the total income generated by a business through its sales of goods or services, without deducting any costs. Taxes are not levied on revenues because they do not account for the costs incurred in running the business. Income tax laws are designed to tax profits (the excess of revenue over costs), not gross income.
In summary, businesses are taxed on accounting profits, which provide a standardized method for determining taxable income. These profits exclude non-cash expenses like depreciation and certain deductions, making them suitable for taxation by authorities.