Capital Gain Tax

• A capital-gains tax is levied on profits made from the sale of capital

assets, such as land, buildings, or equipment.
• The profit is known as long-term capital gain if the asset was held for
more than one year.
• The profit is known as short-term capital gain if the time held is less
than those indicated for long-term capital gain.
• The net capital gain is the total of short-term and long-term capital
gains, and this total is generally taxed for corporations at the same rate
as ordinary income in the year the gain occurred
Carry Back or Carry Forward of Losses
• The preceding analyses of taxes have been based on the assumption
that the corporations involved were operating at a profit.
• In case the situation was one in which a loss resulted, some method of
tax accounting needs to be available for this case of negative taxable
income.
• To handle this possible situation, tax regulations permit the
corporation to use the loss to offset profits in other years by carry-
back or carry-forward of losses.
• Tax laws permit a corporation to carry its losses back as charges against profits for
as many as three years before the loss.
• If necessary, corporation have permission to carry the losses forward as charges
against profits for as many as five years after the loss.
Taxes and Depreciation
• In determining the influence of depreciation costs on income taxes, it should be
clear that depreciation costs represent a deduction from taxable gross earnings.
Thus, if d is the depreciation cost for the year and Φ is the fractional tax rate,

• Funds set aside for depreciation, although they represent a cost, normally go
directly into the corporation treasury.
• Therefore, if S represents the total annual income or revenue and C represents the
total annual costs with the exceptions of depreciation and taxes,

(S - C - d)(l - Φ) + d = (S - C)(l - Φ) + Φd
Excess Profit Tax
• During times of national emergency, certain types of business concerns can realize
extremely high income and profit.
• This is true in particular for concerns producing military necessities during
wartime. An excess-profits tax may be levied, therefore, to supply the national
government with part of these profits.
Insurance
• The annual insurance cost for ordinary industrial concerns is approximately 1
percent of the capital investment.
• Despite the fact that insurance costs may represent only a small fraction of total
costs, it is necessary to consider insurance requirements carefully to make certain
the economic operation of a plant is protected against emergencies or unforeseen
developments.
• Many different types of insurance are available for protection against property
loss or charges based on legal liability.
Types of Insurance
• Insurance is classified into different types based upon its occurrence and
consequences.
• Despite every precaution, there is always the possibility of an unforeseen
event causing a sudden drain on a company’s finances, and an efficient
management protects itself against such potential emergencies by taking
out insurance.
1. Fire insurance and similar emergency coverage on buildings,
equipment, and all other owned, used, or stored property. Included in this
category would be losses caused by lightning, wind- or hailstorms, floods,
automobile accidents, explosions, earthquakes, and similar occurrences.
2. Public-liability insurance, including bodily injury and property loss or damage,
on all operations such as those involving automobiles, elevators, attractive
nuisances, bailee’s charges, aviation products, or any company function carried on
at a location away from the plant premises.
3. Business-interruption insurance. The loss of income due to a business
interruption caused by a fire or other emergency may far exceed any loss in
property. Consequently, insurance against a business interruption of this type should
be given careful consideration.
4. Power-plant, machinery, and special-operations hazards
5. Workmen’s-compensation insurance.
6. Marine and transportation insurance on all property in transit.
7. Comprehensive crime coverage.
8. Employee-benefit insurance, including life, hospitalization, accident, health,
personal property, and pension plans.
Self Insurance
• On an average basis, insurance companies pay out loss claims amounting to 55 to
60 cents for each dollar received.
• The balance is used for income taxes, salaries, commissions, administrative costs,
inspection costs, and various overhead costs. Theoretically, a saving of 40 to 45
cents per dollar paid for insurance could be achieved by self-insurance.
• If insurance requirements are great, this saving could amount to a very large sum,
and it would be worthwhile to consider the possibilities of self-insurance.