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Net of tax is a financial accounting term and convention that presents the value of an item as an amount with the assessment of tax on it already factored out. Basically, it is the value of the item after the taxes have been deducted. Instead of explaining the discrepancy, the value of the item is listed as net of tax, which informs the reader of the underlying calculation.
Financial accounting conventions differ from country to country. Within jurisdictions, accounting practices are structured to be uniform. Uniformity enables investors to evaluate the financial condition of a company based on financial statements that use the same underlying conventions and calculations. An accounting convention that is in use in many jurisdictions, such as in the U.S., is the concept of presenting an amount in the financial statements as net of tax.
The tax liability regarding something a company owns or does is typically listed as a separate category under expenses. This enables a person reviewing the company’s operations to know exactly where money has gone with the specificity needed to evaluate the item’s particular effect on the company’s bottom line. If an analyst wants to determine where a company can cut expenses, he can evaluate the tax liability account to see if it seems unnecessarily high and should be a candidate for cost savings with a change in operations.
If an item is presented in the financial statements as net of tax, however, the tax account is artificially deflated. Tax paid is not actually shown on the books. A notation is instead made that the tax attached to a specific item is not being carried on the statements as it ordinarily would be as a regular expense.
Presenting items net of tax is generally concerned an unacceptable accounting practice by many accounting standards organizations. The practice is typically reserved for certain instances where the effect of the tax is a one-time occurrence or likely to skew the financial statements unrealistically in one year. For example, a net of tax calculation can be used to show an extraordinary gain or loss on an income statement or the one-time influx of income from a business division that has been sold.
The concept of net of tax is also used in salaries for employees assigned to foreign countries. Companies who set up foreign operations and assign non-citizen employees to the location can pay an employee a salary that is quoted net of tax. This means that the amount quoted as salary is the amount the employee will receive in-hand, and the company will pay any tax assessed by the host country.
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