Net of Tax
What it is:
How it works/Example:
For example, let's say you win $1,000,000 on a game show. After the show, a nice person backstage will also give you an IRS Form 1099 so that you can pay state and local taxes on the winnings. Depending on where you live and where the show tapes, you not only have to pay 40% in federal taxes, but you also must pay 5% to the state in which you won the money and 5% to the state in which you live. Your winnings net of tax would equal:
$1,000,000 - $400,000 - $50,000 - $50,000 = $500,000
Why it matters:
In business and in life, it is always important to factor in the effects of taxes. They considerably reduce much of the cash flows available to businesses and individuals, and their existence has a significant impact on investment decisions. Thus, determining cash flows net of tax is a key factor in financial analysis.