Why does accounting profit differ from taxable profit?
The profit on the income statement and the profit on which corporate tax is calculated are not the same. Tracking the items that create the gap during the year means the year-end tax bill is no surprise and the cash plan is built correctly.
Accounting profit (ticari kâr) is the profit on a company’s income statement, the difference between the period’s income and expenses. Taxable profit (mali kâr) is the income on which corporate tax is calculated, reached after the additions and deductions required by tax law.
In Turkey, because the books are kept under tax law, the gap between the two does not arise from differences in financial reporting standards but from adjustments made on the tax return. The size of those adjustments determines the company’s real tax burden.
From accounting profit to taxable profit
In simplified form:
| Step | Explanation |
|---|---|
| Accounting profit | Profit for the period on the income statement |
| + Non-deductible expenses (KKEG) | Amounts expensed in the books but not deductible for tax |
| − Exempt income | Income excluded from tax by law |
| − Prior-year losses | Losses that can be carried forward within the legal period and conditions |
| − Deductions | Deductions provided by law (e.g. incentives such as the R&D deduction) |
| = Taxable profit (corporate tax base) | The amount on which tax is calculated |
Non-deductible expenses
Non-deductible expenses are the main item that pushes taxable profit above accounting profit. Examples listed in the Corporate Tax Law and Income Tax Law include:
- Payments such as tax penalties and late-payment interest,
- Amounts within the scope of thin capitalisation and disguised profit distribution through transfer pricing,
- The portion of passenger car expenses above the limits in the legislation,
- Corporate tax itself.
Most non-deductible expenses arise during the year and can be tracked separately in the books. If they are not tagged or kept in a separate sub-account, calculating them at year end takes time and risks missing some.
Exemptions and deductions
Exemptions bring taxable profit below accounting profit. One of the best-known examples is the exemption, under certain conditions, for dividends received from domestic subsidiaries. Incentive-type deductions have a similar effect. Each exemption and deduction has its own conditions; whether it applies should be confirmed against current legislation.
Why track the gap during the year
The gap between accounting and taxable profit is often calculated only at year end, when the return is being prepared. Tracking it during the year has three concrete benefits:
- The tax burden is visible in advance. When non-deductible expenses and exemptions are tracked during the year, taxable profit can be estimated without waiting for year end.
- The cash plan is built correctly. Advance tax and corporate tax payments are estimated on taxable profit, not accounting profit, and reflected in the cash plan. I explain the method on the tax from a CFO’s perspective page.
- Management sees the real tax burden. Tax paid as a share of accounting profit (the effective tax rate) can differ noticeably from the statutory rate, and management should know this when taking decisions.
Link to financial reporting
When financial statements are prepared under TFRS or BOBİ FRS, differences between accounting profit and the tax base fall into two groups: permanent differences (much of the non-deductible expenses and exemptions) and temporary differences. Temporary differences are the subject of deferred tax.
I discuss why the tax consequences of decisions should be seen when the decision is made in Tax belongs at the start of the decision, not the end.
Frequently asked questions
Can a company with an accounting loss pay tax?
Yes. If non-deductible expenses are high, a company with an accounting loss can still have positive taxable profit.
Can prior-year losses be carried forward indefinitely?
No. Under corporate tax legislation the carry-forward of losses is limited in time (five years as a general rule). Losses not used within the period are lost, so tracking them is part of tax planning.