Accounting vs taxable profit/loss

You have probably heard these terms from your accountant. But how does your business end up with two often very different results?

Accounting profit/loss

This comes from a simple calculation: revenue – expenses. No distinction is made between deductible and non-deductible expenses.

Taxable profit/loss

Here things start to get slightly more complicated. Taxable profit is calculated under the Income Tax Act. The calculation: revenue – tax-deductible expenses

All expenses deductible

Our basic example is company ABC s.r.o.:

Revenue CZK 300,000
Expenses – deductible CZK 250,000
Expenses – non-deductible CZK 0
Accounting profit 300.000 – 250.000 = CZK 50,000
Taxable profit 300.000 – 250.000 = CZK 50,000
Tax rate 21 %
Tax 50.000 * 21 % = CZK 10,500

You pay CZK 10,500 to the tax office.

Deductible and non-deductible expenses

In practice, we most often see some expenses being non-deductible. The results of our example company ABC s.r.o. look like this:

Revenue CZK 300,000
Expenses – deductible CZK 200,000
Expenses – non-deductible (business entertainment) CZK 50,000
Accounting profit 300.000 – 200.000 – 50.000 = CZK 50,000
Taxable profit 300.000 – 200.000 = CZK 100,000
Tax rate 21 %
Tax 100.000 * 21 % = CZK 21,000

You pay CZK 21,000 to the tax office.

Deductible and non-deductible expenses (donations)

Some companies donate part of their revenue to charity. The results of our example company ABC s.r.o. look like this:

Revenue CZK 300,000
Expenses – deductible CZK 200,000
Expenses – non-deductible (business entertainment) CZK 40,000
Expenses – non-deductible (charitable donations) CZK 10,000
Expenses – non-deductible – total CZK 50,000
Accounting profit 300.000 – 200.000 – 50.000 = CZK 50,000
Taxable profit 300.000 – 200.000 = CZK 100,000
Deduction for an eligible donation 100.000 – 10.000 = CZK 90,000
Tax rate 21 %
Tax 90.000 * 21 % = CZK 18,900

You pay CZK 18,900 to the tax office.

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