Corporate Profits: Profits Before Tax, Profits Tax Liability, and

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Transcript of Corporate Profits: Profits Before Tax, Profits Tax Liability, and

  • U.S. Department of CommerceDonald L. Evans, Secretary

    September 2002

    Bureau of Economic AnalysisJ. Steven Landefeld, DirectorRosemary D. Marcuss, Deputy Director

    ECONOMICS AND STATISTICS ADMINISTRATION

    Economics and Statistics AdministrationKathleen B. Cooper, Under Secretary

    for Economic Affairs

    Corporate Profits

    Profits Before Tax,

    Profits Tax Liability,

    and

    Dividends

    Methodology Paper

  • iii

    Kenneth A. Petrick of the National Income and Wealth Divi-sion prepared this paper on corporate profits. Table prepara-tion and assistance were provided by Willie J. Abney, ScottOkrent, and Angela P. Pointer.

    Comments about the paper are invited. Send commentsor questions to Kenneth A. Petrick, National Income andWealth Division, Bureau of Economic Analysis, U.S. Depart-ment of Commerce, Washington, DC 20230, or e-mail [email protected]

    Acknowledgments

  • v

    Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Corporate profits in the NIPAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2NIPA tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Overview of estimating procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

    Annual Estimates Derived From Corporation Income Tax Returns . . . . . . 7Profits before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Profits tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

    Extrapolated Annual Estimates and Quarterly Estimatesof Profits Before Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Reconciliation items prepared at the all-industry level . . . . . . . . . . . . . 17Agriculture, forestry, and fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Mining. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Electric, gas, and sanitary services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Credit agencies other than banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Security, commodity brokers, and services . . . . . . . . . . . . . . . . . . . . . . . 22Insurance carriers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Insurance agents, brokers, and services . . . . . . . . . . . . . . . . . . . . . . . . . . 22Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Real estate investment trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Holding and other investment companies excluding real estate

    investment trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Rest of the world. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

    Extrapolated Annual Estimates and Quarterly Estimates of Profits Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Reconciliation items: First July annual estimates . . . . . . . . . . . . . . . . . . 23Industry extrapolations and the control: Annual estimates . . . . . . . . . . 23Quarterly estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

    Extrapolated Annual Estimates and Quarterly Estimates of Dividends . . 24Sources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Appendix A: Financial, Tax, and National Income and

    Product Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Selected Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

    Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281996 Corporation Income Tax Form 1120 . . . . . . . . . . . . . . . . . . . . . . . 29Codes for Principal Business Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Sample Table: Returns of Active Corporations for 1996. . . . . . . . . . . . . 34

    Contents

  • 1

    Introduction

    Corporate profits is one of the most closely followedeconomic indicators. Profitability provides a summarymeasure of corporate success or failure and thus servesas an essential indicator of economic performance.Profits are a source of retained earnings, providingmuch of the funding for investment in plant andequipment that raises productive capacity. Profits arealso frequently used in measuring the rate of return oninvestment and the relationship between earnings andequity valuation. Profits may also be used to evaluatethe effects on corporations of changes in policy or ineconomic conditions. Finally, corporate profits is animportant component of the Nations overall incomeand play a role in measuring the total income resultingfrom production and the distribution of income acrosssectors.

    This paper presents the conceptual basis and frame-work underlying the estimates of corporate profits inthe national income and product accounts (NIPAs)and describes the sources and methods used to prepareannual and quarterly estimates of corporate profits.

    This introduction is split into four sections: Section1 discusses the concept of corporate profits in thecontext of the NIPAs. Sections 2 and 3 provide the def-initions of each component of corporate profits, fol-lowing the order of table 1, and a guide to the NIPAtables in which the estimates appear. Finally, section4 provides an overview of the sources and methodsused to prepare the annual and quarterly estimates ofprofits before tax (PBT), one of the three componentsof corporate profits. The remaining chapters of thepaper provide detailed descriptions of the derivationand extrapolation of PBT, of profits tax liability, and ofdividends.

    Corporate profits in the NIPAs

    The Bureau of Economic Analysis (BEA) prepares esti-mates of current production and related incomes inan integrated system of national accounts that providesa comprehensive measure of economic activity withina consistently defined framework. This system is sum-marized in five accounts that aggregate individualtransactors into sectors and that show the broad cate-gories of economic transactions in which they engage.1

    1. For a discussion of the integrated system and the five summary ac-counts, go to BEAs Web site at , click on Methodologies,and under National programs, see MP1: Introduction to National Eco-nomic Accounting.

    Corporate profits is a component on the income sideof the first of these summary accounts, the NationalIncome and Product Account.

    The National Income and Product Account illus-trates the two methods of estimating the preeminentmeasure of U.S. output, gross domestic product(GDP). The expenditures (right) side of the accountmeasures GDP as the sum of goods and services pro-duced by labor and property located in the UnitedStates and sold to final users; the income (left) sidemeasures GDPor its conceptual equivalent, grossdomestic income (GDI)as the sum of the incomesgenerated in that production. Specifically, corporateprofits is a component of national incomethe mea-sure of all incomes earned by U.S. residents regardlessof the location of labor and property (before the ad-justments made in the derivation of GDI). It includesincome earned abroad by U.S. corporations and ex-cludes income earned in the United States by foreigncorporations.2

    Corporate profits reflects the income earned by cor-porations as a result of current production; the mea-sure is defined as receipts arising from currentproduction less associated expenses. Receipts excludeincome in the form of dividends and capital gains, andexpenses exclude bad debts, natural resource deple-tion, and capital losses.

    Most businesses prepare two sets of profits informa-tion: Financial and tax. Both financial accounting andtax accounting define a corporations profits as the dif-ference between its receipts and its expenses, but theydiffer with respect to the definition of some receiptsand expenses; in the timing of when the receipts andexpenses are recorded (see appendix A); and for whomthe information is prepared. Financial-accountingmeasures, which reflect generally accepted accountingprinciples, underlie the reports to stock holders and togovernment regulatory agencies; tax-accounting mea-sures underlie corporate income tax returns.