Taxes Based on Net Income Projection Method
The Taxes Based on Net Income projection method allows you to automatically calculate income tax expenses using a tiered tax rate schedule applied to projected net income.
This method is assigned by default to any account added under the Provision for Taxes section of the Income Statement.
1️⃣ When to Use This Method
Use Taxes Based on Net Income when you want to:
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Automatically compute income tax based on projected net income.
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Apply progressive tax brackets with defined thresholds and rates.
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Ensure consistency between your Income Statement and Balance Sheet tax liability.
For other types of tax accounts (e.g., payroll or sales tax), use Other Taxes with standard projection methods such as Manual Entry, Growth Rate, or Trend.
2️⃣ Applying the Method
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Double-click on the tax account, or right-click and select Edit.
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Choose the Taxes Based on Net Income method.
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A tax rate schedule window will appear.
3️⃣ Setting Up the Tax Rate Schedule
In the tax schedule window:
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Define your income brackets and corresponding tax rates.
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You can create up to 10 separate brackets.
Example:
| Bracket | Income Range | Tax Rate |
|---|---|---|
| 1 | $0 – $250,000 | 15% |
| 2 | $250,000+ | 25% |
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Use the Tax Adjustments grid below to manually adjust yearly tax totals if needed.
4️⃣ How PlanGuru Calculates Taxes
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PlanGuru calculates total projected annual taxable income first.
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It then applies the defined tax brackets and rates to compute annual income tax.
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Finally, it allocates the annual total across months automatically.
⚠️ Important: Each month’s tax expense is not a direct function of that month’s income.
Instead, it’s based on the full-year projected taxable income — since income taxes are typically paid annually.
5️⃣ Reviewing and Validating Results
To validate the calculation:
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Review the year-end total rather than individual months.
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Confirm that taxable income and rates match your assumptions.
If needed, make tax adjustments in the projection method screen to fine-tune annual totals.
6️⃣ Linking to the Balance Sheet
Most users also set up an Accrued Income Tax Liability account on the Balance Sheet.
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Link your tax expense line to this account to properly record the liability buildup.
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Use the Accrued Expense projection method to manage timing of payments.
🎥 For detailed steps, watch the Accrued Expense Projection Method tutorial.