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what are inferior goods | inferior goods are goods for which demand declines as consumers real incomes rise or rises as incomes fall consumers with more money may opt to buy more expensive substitutes instead of what they could afford only when incomes were lower the bottom linethe income effect identifies the change in consumers demand for goods and services based on their incomes in general as one s income rises they will begin to demand more goods similarly a decrease in income results in lower demand the marginal propensity to spend and the marginal propensity to save are looked at when determining the influences of the income effect the substitution effect also plays a role in how consumers spend their income in times of rising or declining income for normal goods the income effect works as predicted for inferior goods it works in the opposite direction | |
what is income elasticity of demand | income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in the real income of consumers who buy this good the formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income with income elasticity of demand you can tell if a particular good represents a necessity or a luxury investopedia paige mclaughlinunderstanding income elasticity of demandincome elasticity of demand measures the responsiveness of demand for a particular good to changes in consumer income the higher the income elasticity of demand for a particular good the more demand for that good is tied to fluctuations in consumers income businesses typically evaluate the income elasticity of demand for their products to help predict the impact of a business cycle on product sales depending on the values of the income elasticity of demand goods can be broadly categorized as inferior and normal goods normal goods have a positive income elasticity of demand as incomes rise more goods are demanded at each price level normal goods whose income elasticity of demand is between zero and one are typically referred to as necessity goods which are products and services that consumers will buy regardless of changes in their income levels examples of necessity goods and services include tobacco products haircuts water and electricity as income rises the proportion of total consumer expenditures on necessity goods typically declines inferior goods have a negative income elasticity of demand as consumers income rises they buy fewer inferior goods a typical example of such a type of product is margarine which is much cheaper than butter furthermore luxury goods are a type of normal good associated with income elasticities of demand greater than one consumers will buy proportionately more of a particular good compared to a percentage change in their income consumer discretionary products such as premium cars boats and jewelry represent luxury products that tend to be very sensitive to changes in consumer income when a business cycle turns downward demand for consumer discretionary goods tends to drop as workers become unemployed formula for income elasticity of demandthe formula for income elasticity of demand is example of income elasticity of demandconsider a local car dealership that gathers data on changes in demand and consumer income for its cars for a particular year when the average real income of its customers falls from 50 000 to 40 000 the demand for its cars plummets from 10 000 to 5 000 units sold all other things unchanged the income elasticity of demand is calculated by taking a negative 50 change in demand and dividing it by a 20 change in real income this produces an elasticity of 2 5 which indicates local customers are particularly sensitive to changes in their income when it comes to buying cars types of income elasticity of demandthere are five types of income elasticity of demand | |
how do you interpret income elasticity of demand | income elasticity of demand describes the sensitivity to changes in consumer income relative to the amount of a good that consumers demand highly elastic goods will see their quantity demanded change rapidly with income changes while inelastic goods will see the same quantity demanded even as income changes | |
what does an income elasticity of demand of 1 50 mean | since the value is positive the good is elastic it implies that for every 1 increase in income people will demand an increase of 1 5 in the number of goods thus if the average income is 100 000 and at that level of income people desire 70 meals out a year they would demand 71 meals a year if income rose to 101 000 1 5 of 70 1 05 meals more | |
how does income elasticity of demand differ from price elasticity of demand | price elasticity of demand measures the change in percentage of demand caused by a percent change in price rather than a percent change in income can income elasticity of demand be negative yes for example with certain inferior goods the more money people have the less likely they are to buy cheaper products in favor of higher quality ones | |
what is something that is inelastic to changes in income | inelastic goods tend to have the same demand regardless of income certain staples and basics such as gasoline or milk would not change with income you ll still only need one gallon a week even if your income doubles the bottom lineincome elasticity of demand is the change in quantity demanded of a good or service in relation to the change in real income of a consumer that buys that good or service it is a primary variable in the causes for price elasticity income elasticity of demand will denote whether a product is an essential item or a luxury item the higher the inelasticity of demand for a good or service the more sensitive the demand for it is to fluctuations in consumer income if a good or service has a high inelasticity of demand it will experience a decline in demand when the real income of consumers decreases if real income increases it will see an increase in demand if a good or service has a low inelasticity of demand its demand will not significantly change regardless of what happens to the real income of consumers correction march 7 2023 a previous version of this article incorrectly defined an income elasticity of demand of 1 5 in an example it has been edited to reflect that an elasticity of demand of 1 5 refers to an increase of 1 5 in the percentage of the quantity demanded not an increase of 1 5 units | |
what does income from operations mean | income from operations ifo is also known as operating income or ebit income from operations is the profit realized from a business s own operations income from operations is generated from running the primary business and excludes sundry income from other sources for example this would exclude income generated from selling the property of a manufacturing company understanding income from operations ifo income from operations is the same as operating income by only looking at the profit generated in normal business operations it makes it easier to understand the potential future profitability of the company to calculate operating income start with revenue from operations then subtract the cost of goods sold and other operating expenses such as the cost of labor interest earned or paid should not be included taxes paid should not be deducted either do not include any gains or losses from investments or the purchase or sale of business assets income from operations only involves revenue and expenses involved in the day to day run of the business example of income from operationsfor example if a car company spends 100 000 building and selling cars then sells them for 110 000 it has 10 000 in income from operations because this is income generated only from normal operations an investor could assume that similar income will be generated every year as long as operations continue as another example if bob sells apples he could take the revenue he earned from selling the apples then subtract the costs incurred for care and picking of the apple trees while the apples were growing then subtract anything he paid to folks to care for pick or sell the apples the amount left over would be the operating income from bob s apple business | |
what is an income fund | an income fund is a type of mutual fund or exchange traded fund etf that emphasizes current income either on a monthly or quarterly basis as opposed to capital gains or appreciation such funds usually hold a variety of government municipal and corporate debt obligations preferred stock money market instruments and dividend paying stocks the basics of income fundsshare prices of income funds are not fixed they tend to fall when interest rates are rising and to increase when interest rates are falling generally the bonds included in the portfolios of these funds are investment grade the other securities are of sufficient credit quality to assure the preservation of capital there are two popular types of high risk funds that also focus mainly on income high yield bond funds that invest primarily in corporate junk bonds and bank loan funds that invest in floating rate loans issued by banks or other financial institutions income funds come in several varieties the primary differentiation involves the types of securities they invest in to generate income money market fundsmoney market funds generally invest in certificates of deposit cds commercial paper and short term treasury bills these funds are designed to be very safe investments aiming to maintain a low share price at all times but they also tend to offer relatively low yields while these funds don t carry the federal deposit insurance corporation fdic insurance that bank products do money market funds have traditionally provided a high degree of safety bond fundsbond funds typically invest in corporate and government bonds government bond funds carry virtually no default risk and therefore can act as a safe haven for investors in times of uncertainty but normally offer lower yields than comparable corporate bond funds corporate bonds carry the additional risk that the issuer may not be able to make principal or interest payments as a result they tend to pay higher interest rates to account for the additional risk corporate bond funds can be split into investment grade bond funds and below investment grade or junk bond funds equity income fundsmany companies pay dividends on their stocks funds invested primarily in stocks that pay regular dividends are known as equity income funds these types of funds are especially popular among retirement age investors that look to live off of the predictable monthly income generated from their portfolios historically dividends have provided a significant percentage of a stock s total long term return other income fundsother income producing funds include those focused on real estate investment trusts reits master limited partnerships mlps and preferred stocks example of an income fundthe t rowe price equity income fund has 17 51 billion in net assets as of q1 2021 and seeks a high rate of growth through high dividend paying stocks in combination with capital appreciation the fund which distributes payouts quarterly paid a dividend of 0 18 per share on dec 14 2020 the fund has performed relatively in line with its benchmark 1 an investment of 10 000 in the t rowe price equity income fund at inception in 1985 would be worth around 24 5100 as of feb 28 2021 the lipper equity income funds average result for the same amount over the same period would be about 25 150 | |
what is income in respect of a decedent ird | income in respect of a decedent ird refers to untaxed income that a decedent had earned or had a right to receive during their lifetime taxes on ird are owed by the individual beneficiary or entity that inherits this income however ird also counts toward the decedent s estate for federal estate tax purposes potentially drawing a double tax hit fortunately the beneficiary may be able to take a tax deduction for the estate tax paid on ird the beneficiary must declare ird as income for the year in which they receive it understanding income in respect of a decedent ird ird is defined in internal revenue code section 691 2 sources of income include the following 3other sources of ird are ird is also any income from sales commissions and ira distributions owed to the decedent at the time of their death 1 | |
how ird is taxed | ird is taxed in the same way it would have been had the decedent received the money while living for example capital gains are taxed at the capital gains rate and uncollected compensation is taxed as ordinary income on the beneficiary s tax return for the year they received it there is no step up in basis for irds 1 | |
how ird works for iras and 401 k s | other common examples of ird are distributions from tax deferred qualified retirement plans such as 401 k s and traditional individual retirement accounts iras that are passed on to a beneficiary if an individual dies leaving a 1 million ira to his beneficiary the beneficiary will be responsible for paying taxes on any distributions made from the account 1the beneficiary may have to start taking required minimum distributions rmd s at a certain point a living spouse who is the sole beneficiary has certain rights not granted to another type of beneficiary for example a spouse can rollover the decedent s ira assets into their own ira and postpone rmds until age 73 any beneficiary spouse or otherwise must follow specific rmd rules and is liable for applicable taxes on distributions 14the age for rmds was raised to 72 with the passage of the setting every community up for retirement enhancement secure act in december 2019 then in december 2022 the passage of the secure 2 0 act raised the age to 73 5if the decedent died on or after reaching the age of rmds their rmd for the year of death may factor into their estate for instance if no specific beneficiaries were designated in the account file paperwork for the retirement account where it was held if the amount of the rmd were to push the decedent s estate beyond the federal exclusion an estate tax would kick in the federal exclusion amount for 2024 is 13 61 million 6to try to minimize this impact individuals and married couples employ estate planning strategies that transfer assets to trusts one option is a credit shelter trust which postpones estate taxes until the death of the surviving spouse | |
how do i report ird | if you as beneficiary received such income you ll report it on your personal income tax return for the year that you received it 1 | |
what s the difference between inheritance and ird | inheritance is property bequeathed to you by a decedent income in respect of a decedent or ird is income that was owed to the decedent but wasn t received by them before their death that income may go to the beneficiary for example a required minimum distribution from an ira that you are to inherit that was to be taken by the decedent the year the decedent passed away will have to be taken by you while you don t normally owe taxes on inheritance you will owe taxes on ird that you receive | |
how is a beneficiary taxed on ird that s a required minimum distribution | just as the decedent would have been for example an rmd from a traditional ira would have been reported by the decedent as regular income and taxed as such the beneficiary will report the rmd in the same way and will owe tax that corresponds to their income tax bracket the bottom lineird is income that is owed to an individual who dies before receiving it if a beneficiary receives this money they will owe taxes on it if the ird generates a tax liability for the decedent s estate a beneficiary may be able to claim a deduction for estate taxes connected to the ird amount | |
what is income inequality | income inequality refers to how unevenly income is distributed throughout a population the less equal the distribution the greater the income inequality income inequality is often accompanied by wealth inequality which is the uneven distribution of wealth populations can be divided up in different ways to show different levels and forms of income inequality such as income inequality by gender or race different measures such as the gini index can be used to analyze the level of income inequality in a population understanding income inequalityincome inequality or the imbalance of income earned by a group people exists in countries throughout the world in the u s these differences in income have become pronounced over the past fifty years income inequality is not the same as wealth inequality the former involves salaries wages while the latter involves net worth some of the factors that affect income inequality include 123globalization the increase in trade among nations resulted in the move of manufacturing and other jobs by corporations in the u s to countries where labor costs were cheaper for working class and middle class americans this meant that secure even generational jobs and income disappeared advances in technology while a boon in many ways certain workplace technological advancements such as automation have led to the loss of jobs for blue collar workers and lower wages for less educated workers gender and race bias income disparities have always been clearly visible for women and people of color it s widely acknowledged that for example male employees typically earn more than female employees in the same job positions likewise white males earn more than non white males education workers with less than a high school education experience less growth in wages than those with college educations and post graduate degrees the announcements of multi million dollar salaries and bonuses even in troubling economic times going to c suite executives drives this income disparity home economic conditions when economic conditions weaken financial turmoil unemployment slowing business investment and more can affect incomes taxation although high income earners pay a larger percentage of their income in taxes than lower income earners federal taxation has not put the brakes on increasing income inequality that may be due to certain tax policies e g those related to corporate taxation the capital gains tax rates and income tax cuts that benefit those with higher income more than those with lower income some degree of income inequality is to be expected because of basic differences in talent effort and simple chance however according to the international monetary fund imf too much income inequality could erode social cohesion lead to political polarization and ultimately lower economic growth 3political upheaval and the disappearance of social educational and economic opportunities to improve standards of living and financial futures can also be consequences of income disparity income inequality and income disparity can be analyzed through a variety of segmentations income distributions by demographic segmentation form the basis for studying income inequality and income disparity the different types of income segmentations studied when analyzing income inequality may include | |
how to measure income inequality | one way to measure income inequality is to compare the income of a large group of high earners for example the top 10 to the national median or average another approach compares the income of a lower earning group say the bottom 10 to the median or average other researchers have begun looking at tax records of those with the highest incomes to draw conclusions about these most affluent slices of society a frequently used tool for measuring income inequality is the gini index it was developed by italian statistician corrado gini in the early 1900s to help quantify and more easily compare income inequality levels across countries of the world 4 the index can range from 0 to 100 with a higher level indicating greater income inequality among a country s population and a lower level indicating less 5the latest available data from the world bank shows south africa reporting one of the highest income inequality dispersions with a gini index level of 63 0 the united states has a gini index level of 39 8 the slovak republic has the world bank s lowest gini index reading at 24 1 6 | |
how to reduce income inequality | dispersions of income inequality are an ongoing area of analysis for both local and global governing institutions the imf and world bank have a goal to help improve the income of the lowest 10 of earners in all countries through their missions relating to financial stability long term economic development and poverty reduction globally new innovations in financial technologies and production are helping to improve the banking services for the world s lowest income earners as a worldwide initiative for financial inclusion is underway in addition income inequality will be addressed more successfully when political economic and social leaders can agree on basic approaches to its improvement income inequality in the united statesincome inequality in the u s has been increasing since the 1970s throughout the 20th century and up to the present this inequality has been exacerbated by government tax and labor policies and ongoing discrimination by race and gender a weakening middle class has also contributed to income inequality 2the organizations below conduct research and produce analysis reports on various examples of income inequality income disparity and income distributions in the u s in an analysis of 60 years of economic data the urban institute showed that the poorest got poorer while the richest got much richer between 1963 and 2022 7the urban institute also researches the racial and ethnic wealth gap in the u s the organization reported that white families in 1963 had amassed a median wealth of approximately 45 000 more than families of color by 2019 the median wealth for white families increased to approximately 153 000 more than latinx families and 165 000 more than black families 8the federal reserve provides a quarterly distributional financial accounts report this report shows wealth distributions for u s households as of the first quarter of 2024 the federal reserve showed the following distributions of wealth across the u s 9in december 2023 the economic policy institute released a report on disparities between wage growth across different income levels for those in the bottom 90 wages grew just 32 9 from 1979 to 2022 for those in the top 1 wages grew 171 7 for those in the top 0 1 wages grew 344 4 10there can be many factors associated with this trend including salary stagnation for wage earning americans tax cuts for the richest americans a loss of manufacturing jobs and a soaring stock market that inflated the worth of corporate executives and hedge fund managers however it s noteworthy that wage inequality may also shrink due to declines in the stock market which occurred in 2022 10post recession companies are also investing heavily to hire and keep workers with specialized skills in fields such as engineering and healthcare this has caused reductions or new automation takeovers in other functions pushing down wages for workers in less competitive jobs furthermore epi data tracks wages by segment on a regular basis as of 2023 it showed the following averages for white black and hispanic workers 11income inequality is an economic concept that tends to hit some segments of populations harder than others with significant wage gaps often identified for women black people and hispanic people working in the u s according to a study of incomes for full time workers by the institute for women s policy research in 2022 women of all races and ethnicities were paid an average of 83 of the salaries paid to men when both part and full time incomes are included women earn just 77 4 cents for each dollar a man earned the same report also broke down earnings by race and gender it noted that compared to the median weekly earnings of white men working full time hispanic women earned 61 4 of that amount black women earned 67 4 and white women earned 84 2 12data from the pew research center also identifies income inequalities by gender in 2022 according to its latest analysis of hourly earnings of full and part time employees women earned an average of 82 of what men earned this is not much of an improvement over the pay gap in 2002 when women earned 80 as much as men 13an income gap refers to the difference in income earned between demographic segments | |
why is income inequality a problem | it s a serious problem because the lack of financial stability for large portions of a population can promote potentially destructive social and economic upheaval generally as well as financial hardships and lower standards of living in particular | |
what are 3 effects of income inequality | financial hardship for many persistent poverty and a dispirited populace that could be ripe for social and political unrest are just a few of the effects of income inequality | |
how can we fix income inequality | to reduce income inequality governments and private sectors must address its various causes including discrimination unfair taxation wage stagnation and more that lead to large imbalances in compensation the bottom lineincome inequality is the disparity of incomes across a population some income inequality is always to be expected because people bring different degrees of talent effort and luck to their endeavors but large imbalances in income have been caused and maintained by discrimination taxation policies the downfall of labor unions troublesome economic conditions such as slow growth and high inflation and more countries must address income inequality to combat the disproportionate prosperity financial hardship and loss of social and economic opportunities that can lead to social discontent and political instability | |
what is per capita income | per capita income is a measure of the amount of money earned per person in a nation or geographic region per capita income is used to determine the average per person income for an area and to evaluate the standard of living and quality of life of the population per capita income for a nation is calculated by dividing the country s national income by its population investopedia madelyn goodnightunderstanding per capita incomeper capita income counts every individual adult and child even newborn babies as a member of the population this stands in contrast to other common measurements of an area s prosperity such as household income which counts all people residing under one roof as a household and family income which counts as a family those related by birth marriage or adoption who live under the same roof the united states census bureau takes a survey of income per capita every year the bureau takes the total income for the previous year for everyone 15 years old and older and calculates the mean average of the data 1the census includes earned income including wages salaries and self employment income interest income dividends including income from estates and trusts and government transfers social security public assistance welfare survivor and disability benefits not included are employer paid healthcare money borrowed insurance payments gifts food stamps public housing capital gains medical care or tax refunds 2according to census bureau data the national per capita income for 2022 latest information was 41 804 the per capita income was lower than the median household income of 74 580 34each metric has its advantages per capita income is helpful when analyzing a large number of people such as the population of the united states which stands at more than 330 million 5median household income is helpful when determining the level of income disparity and poverty in a certain area as the median number eliminates outlier income figures that could skew the data set uses of per capita incomeperhaps the most common use of income per capita is to ascertain an area s wealth or lack of wealth for example income per capita is one metric the u s bureau of economic analysis bea uses to rank the wealthiest counties in the united states the other being median household income 6per capita income is also useful in assessing an area s affordability it can be used in conjunction with data on real estate prices for instance to help determine if average homes are out of reach for the average family notoriously expensive areas such as manhattan and san francisco maintain extremely high ratios of average home price to income per capita 7businesses can also use per capita income when considering opening a store in a town or region if a town s population has a high per capita income the company might have a better chance at generating revenue from selling their goods since the people would have more spending money versus a town with a low per capita income limitations of per capita incomealthough per capita income is a popular metric it does have some limitations since per capita income uses the overall income of a population and divides it by the total number of people it doesn t always provide an accurate representation of the standard of living in other words the data can be skewed whereby it doesn t account for income inequality for example let s say a town has a total population of 50 people who are earning 500 000 per year and 1 000 people earning 25 000 per year we calculate the per capita income as 500 000 50 25 000 1 000 to arrive at 50 000 000 in total income when we divide 50 000 000 1 050 total population the per capita income is 47 619 for the town however the per capita income doesn t give us a true picture of the living conditions for all of those living in the town imagine if federal aid or public assistance was provided to towns based on per capita income the town in our example might not receive the necessary aid such as housing and food assistance if the income threshold for aid was 47 000 or less per capita income doesn t reflect inflation in an economy which is the rate at which prices rise over time for example if the per capita income for a nation rose from 50 000 per year to 55 000 the next year it would register as a 10 increase in annual income for the population however if inflation for the same period was 4 income would only be up by 6 in real terms inflation erodes the purchasing power of the consumer and limits any increases in income as a result per capita income can overstate income for a population the cost of living differences can be inaccurate when making international comparisons since exchange rates are not included in the calculation critics of per capita income suggest that adjusting for purchasing power parity ppp is more accurate whereby ppp helps to nullify the exchange rate difference between countries 8also other economies use bartering and other non monetary activities which are not considered in calculating per capita income per capita income doesn t include an individual s savings or wealth for example a wealthy person might have a low annual income from not working but might draw from savings to maintain a high quality standard of living the per capita metric would reflect the wealthy person as a low income earner per capita includes children from the total population who don t earn any income countries with many children would have a skewed result since they would have more people dividing up the income versus countries with fewer children the welfare of the people isn t necessarily captured with per capita income for example the quality of work conditions the number of hours worked education level and health benefits are not included in per capita income calculations as a result the overall welfare of the community may not be accurately reflected it s important to consider that per capita income is only one metric and should be used in conjunction with other income measurements such as the median income income by region and the percentage of residents living in poverty | |
what is the per capita income in the u s | the per capita income in the u s as of 2022 latest information was 41 804 which compares with a median household income of 74 580 43 | |
what is the difference between gdp and per capita income | gross domestic product gdp is the value of all the finished goods and services produced in a nation it consists of consumer spending government spending investments and net exports per capita income is the amount of income earned per person in a nation | |
what country has the highest gdp per capita | as of 2022 latest information monaco has the highest gdp per capita at 240 862 burundi has the lowest at 259 9the bottom lineby dividing a country s income by its population you arrive at per capita income which is an indicator of the standard of living of a nation the higher the per capita income the better the standard of living this comes with caveats however as national per capita income reflects an entire country where the standard of living can greatly vary by location community and more | |
what is an income property | an income property refers to a piece of real estate that is purchased or developed primarily in order to earn income by renting or leasing it out to others with a secondary goal of price appreciation income properties which are a subset of investment properties may be either residential or commercial investors must take several factors into consideration such as interest rates and the housing market environment before purchasing an income property as there can be unique risks associated with this kind of investment understanding income propertiesincome properties can be a good investment for a variety of reasons it offers an alternative to standard market investments in stocks and bonds it also offers the investor the security of real property with many investment diversification benefits investing in real estate for income requires a broad range of considerations including interest rates and the state of the housing market among others a real estate property can be an excellent long term investment that may even provide a source of income in retirement but income properties require a great deal of analysis to ensure that steady cash flow is available throughout the life of the loan and beyond determining a base rate of income to rentals is often important in order to determine the desired rate of return ror one way to do this is by analyzing the current rental rate on similar properties in the area while factoring in the monthly payments required for the mortgage because the costs to maintain an income property may be high property owners should consider having a financial cushion on which to fall back in cases of emergency this includes being able to pay for repairs regular maintenance or other costs they are liable for on the building like property taxes and utilities managing the cash flow and ensuring that it exceeds the cost of borrowing and expenses helps to increase the return on the owner s investment as mentioned above income properties can be both commercial and residential income producing commercial real estate is mainly used for business purposes such as office buildings retail spaces hotels or mixed use properties residential properties on the other hand are used primarily for personal use by people other than the owner residential income properties may be single or multifamily homes condominiums townhomes apartments or seasonal homes such as cottages special considerationsincome properties may be part of primary residences or additional properties owned by an investor in some cases the homeowner rents out a portion of their own home say their basement or the upper level of the property in order to produce income while maintaining a residence there this is called an owner occupied income property meaning both the owner landlord and the tenant live in the same property a non owner occupied property is one that isn t occupied by the owner and is purely retained for income producing purposes this means the property is only used by the tenants or lessees residential income properties are commonly referred to as non owner occupied an investor typically needs to be approved for a mortgage loan to purchase a property used to generate income investors interested in income producing real estate generally need to have high credit scores and steady incomes to prove they can make monthly installment payments for many investors the most common type of loan for a real estate property will be a conventional bank loan in order to qualify the investor needs to make a formal credit application the bank analyzes information about the borrower through its underwriting process an underwriter provides a loan offer with a specified interest rate principal value and duration based on the underwriting analysis most lenders want investors to have high credit scores and steady income before they approve an income property mortgage income property mortgages are often harder to qualify for than mortgages geared toward owner occupied and single family residences flipping is now a very common investment strategy for many real estate investors with a fix and flip property the income property owner believes the resale value after renovations will cover the cost of interest on the loan and renovation expenses generating an immediate positive return when sold this type of income property investing includes higher risks than conventional income property ownership but it provides for a lump sum payout at the time of resale rather than over a prolonged period of time several resources for fix and flip investors are available in the real estate market such as a fix and flip loan these loans are really popular with online debt crowdfunding platforms willing to take on some of the higher risks of fix and flip investments these loans are generally offered for shorter time periods with higher interest rates than conventional loans with a fix and flip loan the income property is used as collateral and the owner must be prepared to buy and renovate a property to resell it within a short period of time advantages and disadvantages of income propertiesjust like any other investment there are distinct benefits and pitfalls to owning income properties as mentioned above they are great investment opportunities that can provide diversity to someone s portfolio this helps spread the risk across different investment vehicles investors are also able to generate income providing security and savings for their retirement but owning an income property requires a lot of time effort money and patience for instance dealing with tenants can be difficult at times this can lead to additional repairs trips to the home and court costs if the owner needs to pursue an eviction furthermore if the owner isn t able to manage the property themselves they may have to spend additional money to hire a property management company to do the work for them | |
what is income smoothing | income smoothing uses accounting techniques to level out fluctuations in net income from one period to the next companies indulge in this practice because investors are generally willing to pay a premium for stocks with steady and predictable earnings streams as opposed to stocks whose earnings are subject to more volatile patterns which can be regarded as riskier income smoothing is not illegal if the process follows generally accepted accounting principles gaap talented accountants are able to adjust financial books in an above board way to ensure the legality of income smoothing however many times income smoothing is done under fraudulent methods understanding income smoothingthe goal of income smoothing is to reduce the fluctuations in earnings from one period to another to portray a company as if it has steady earnings it s intended to smooth out periods of high income vs periods of low income or periods with high expenses vs periods of low expenses accountants do this by moving around revenues and expenses in a legal fashion examples of income smoothing techniques include deferring revenue during a good year if the following year is expected to be a challenging one or delaying the recognition of expenses in a difficult year because performance is expected to improve in the near future companies might also delay expenses in specific years with plans to raise funding from venture capital or private equity investors having a high ebitda thanks to income smoothing might translate into high valuation through ebitda multiple calculation methods while deliberately slowing revenue recognition in good years may seem counterintuitive in reality entities with predictable financial results generally enjoy a lower cost of financing so it often makes sense for a business to engage in some level of accounting management but it s a fine line between taking what the internal revenue service irs allows and outright deception income smoothing does not rely on creative accounting or misstatements which would constitute outright fraud but rather on the latitude provided in the interpretation of gaap by managing expectations fairly and ethically businesses that employ a touch of income smoothing do not generally raise a red flag reasons for income smoothingthere are many reasons why a company would choose to engage in income smoothing these may include decreasing its taxes attracting new investors or as part of a strategic business move depending on the country companies pay a progressive corporate tax rate meaning that the higher the income earned the higher the taxes paid to avoid this companies may increase provisions set aside for losses or increase donations to charities both of which would provide tax benefits investors look for stability in their investments if a company s financials show volatile earnings an investor may be turned off by the risk and uncertainty of investing in this company a firm that can show consistent returns from year to year is more likely to attract investors who feel more at ease when they see steady returns over a longer time period a business strategy a company can use when they have high profits is to increase expenses in this case it might increase bonuses paid out to employees or hire more workers to increase the cost of payroll if income was expected to be lower for the year they could employ the strategy in reverse laying off workers or reducing bonuses to reduce expenses these moves not only smooth out income but allow a company to operate more efficiently depending on the circumstances example of income smoothingan often cited example of income smoothing is that of altering the allowance for doubtful accounts to change bad debt expense from one reporting period to another for example a client expects not to receive payment for certain goods over two accounting periods 1 000 in the first reporting period and 5 000 in the second reporting period if the first reporting period is expected to have a high income the company may include the total amount of 6 000 as an allowance for doubtful accounts in that reporting period this would increase the bad debt expense on the income statement by 6 000 and reduce net income by 6 000 this would thereby smooth out a high income period by reducing income it s important for companies to use judgment and legal accounting methods when adjusting any accounts | |
what is an income statement | an income statement reveals a company s revenue expenses gains and losses during a particular period also known as the profit and loss p l statement or the statement of revenue and expense it provides valuable insights into a company s operations the efficiency of its management underperforming sectors and its performance relative to industry peers the income statement is one of the three important financial statements used for reporting a company s financial performance over a specific accounting period the other two key statements are the balance sheet and the cash flow statement mira norian investopediaunderstanding the income statementthe income statement is an integral part of the company performance reports that must be submitted to the u s securities and exchange commission sec while the balance sheet provides a snapshot of a company s financials as of a particular date the income statement reports income through a specific period usually a quarter or a year the period the income statement covers is indicated in its heading for example it could read year ended january 31 2024 which would be the company s fiscal year or three months ended march 31 2024 which means the first three months of the calendar year investopedia theresa chiechithe income statement focuses on four key items revenue expenses gains and losses it does not differentiate between cash and non cash receipts sales in cash vs sales on credit or cash vs non cash payments disbursements purchases in cash vs purchases on credit it starts with the details of sales and then works down to compute net income and eventually earnings per share eps essentially it gives an account of how the net revenue realized by the company gets transformed into net earnings profit or loss 1revenue and gainsthe following are covered in the income statement though its format may vary depending upon the local regulatory requirements the diversified scope of the business and the associated operating activities revenue realized through primary activities is often referred to as operating revenue for a company manufacturing a product or for a wholesaler distributor or retailer involved in the business of selling that product the revenue from primary activities refers to revenue achieved from the sale of the product similarly for a company or its franchisees in the business of offering services revenue from primary activities refers to the revenue or fees earned in exchange for offering those services revenue realized through secondary noncore business activities is often referred to as nonoperating recurring revenue this revenue is sourced from the earnings that are outside the purchase and sale of goods and services and may include income from interest earned on business capital parked in the bank rental income from business property income from strategic partnerships like royalty payment receipts or income from an advertisement display placed on business property also called other sundry income gains indicate the net money made from other activities like the sale of long term assets these include the net income realized from one time nonbusiness activities such as a company selling its old transportation van unused land or a subsidiary company revenue should not be confused with receipts payment is usually accounted for in the period when sales are made or services are delivered receipts are the cash received and are accounted for when the money is received a customer may take goods services from a company on sept 28 which will lead to the revenue accounted for in september the customer may be given a 30 day payment window due to his excellent credit and reputation allowing until oct 28 to make the payment which is when the receipts are accounted for expenses and lossesa business s cost to continue operating and turning a profit is known as an expense some of these expenses may be written off on a tax return if they meet internal revenue service irs guidelines these are all expenses incurred for earning the average operating revenue linked to the primary activity of the business they include the cost of goods sold cogs selling general and administrative sg a expenses depreciation or amortization and research and development r d expenses typical items that make up the list are employee wages sales commissions and expenses for utilities such as electricity and transportation these are all expenses linked to noncore business activities like interest paid on loan money these are all expenses that go toward a loss making sale of long term assets one time or any other unusual costs or expenses toward lawsuits while primary revenue and expenses offer insights into how well the company s core business is performing the secondary revenue and fees account for the company s involvement and expertise in managing ad hoc non core activities compared with the income from the sale of manufactured goods a substantially high interest income from money lying in the bank indicates that the business may not be using the available cash to its full potential by expanding the production capacity or that it is facing challenges in increasing its market share amid competition recurring rental income gained by hosting billboards at the company factory along a highway indicates that management is capitalizing upon the available resources and assets for additional profitability income statement structuremathematically net income is calculated based on the following to understand the above formula with some real numbers let s assume that a fictitious sports merchandise business which additionally provides training is reporting its income statement for a recent hypothetical quarter investopedia sabrina jiangthe company received 25 800 from the sale of sports goods and 5 000 from training services for a total of 30 800 in revenue however that money didn t stay in its pocket generating that revenue cost it a total of 10 650 major expenses included procurement costs rent and wages the company also realized net gains of 2 000 from the sale of an old van and incurred losses worth 800 for settling a dispute raised by a consumer if you subtract all the outgoings from the money the company received you are left with 21 350 that s the company s net income for the given quarter the above example is the simplest form of income statement that any standard business can generate it is called the single step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses however real world companies often operate on a global scale have diversified business segments offering a mix of products and services and frequently get involved in mergers acquisitions and strategic partnerships such a wide array of operations diversified set of expenses various business activities and the need for reporting in a standard format per regulatory compliance leads to multiple and complex accounting entries in the income statement listed companies follow the multiple step income statement which segregates the operating revenue operating expenses and gains from the nonoperating revenue nonoperating expenses and losses and offers many more details essentially the different measures of profitability in a multiple step income statement are reported at four different levels in a business s operations gross operating pretax and after tax as we ll see shortly in the following example this segregation helps in identifying how the income and profitability are moving changing from one level to the other for instance high gross profit but lower operating income indicates higher expenses while higher pretax profit and lower post tax profit indicate loss of earnings to taxes and other one time unusual expenses let s look at an example based on the annual income statements of two large publicly listed multinational companies from different sectors technology microsoft and retail walmart reading income statementsthe focus in this standard format is to calculate the profit income at each subhead of revenue and operating expenses and then account for mandatory taxes interest and other nonrecurring one time events to arrive at the net income that applies to common stock though calculations involve simple additions and subtractions the order in which the various entries appear in the statement and their relationships often get repetitive and complicated let s take a deep dive into these numbers for a better understanding the first section titled revenue indicates that microsoft s gross annual profit or gross margin for the fiscal year ending june 30 2023 was 146 05 billion it was arrived at by deducting the cost of revenue 65 86 billion from the total revenue 211 92 billion realized by the technology giant during this fiscal year just over 30 of microsoft s total sales went toward costs for revenue generation 2walmart s revenues cost a lot more money to generate in its fiscal year ended jan 31 2024 the retail giant s cost of sales represented about 76 of revenues 490 14 billion 648 13 billion this indicates that walmart incurred much higher costs than microsoft to generate equivalent sales 3the next section called operating expenses again takes into account microsoft s cost of revenue 65 86 billion and total revenue 211 92 billion for the fiscal year to arrive at the reported figures microsoft spent 27 2 billion on r d and 30 33 billion on sg a total operating expenses are computed by summing all these figures 65 86 billion 27 2 billion 30 33 billion 123 39 billion 2reducing total operating expenses from total revenue leads to operating income or loss of 88 52 billion 211 915 billion 123 392 billion 2 this figure represents the earnings before interest and taxes ebit for its core business activities and is again used later to derive the net income a comparison of the line items indicates that walmart did not spend anything on r d and had higher sg a and total operating expenses than microsoft 3 its operating income for the period was 27 01 billion 648 125 billion 621 113 billion the next section titled income from continuing operations adds net other income or expenses like one time earnings interest linked expenses and applicable taxes to arrive at the net income 72 36 billion for microsoft which is nearly 80 higher than that of walmart 15 51 billion 23eps is computed by dividing the net income figure by the number of weighted average shares outstanding with 7 45 billion outstanding shares for microsoft its eps came to 9 72 per share 72 361 billion 7 446 billion 2 walmart on the other hand had a weighted average of 8 08 billion outstanding common shares during its fiscal year so its eps came to 1 92 per share 15 511 billion 8 08 billion 3microsoft had a lower cost for generating equivalent revenue higher net income from continuing operations and higher net income applicable to common shares compared with walmart uses of income statementsthough the primary purpose of an income statement is to convey details of profitability and business activities of the company to the stakeholders it also provides detailed insights into the company s internal activities for comparison across different businesses and sectors by understanding the income and expense components of the statement an investor can appreciate what makes a company profitable 4based on income statements management can make decisions like expanding to new geographies pushing sales expanding production capacity increasing the use of or the outright sale of assets or shutting down a department or product line competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting r d spending creditors may find income statements of limited use as they are more concerned about a company s future cash flows than its past profitability research analysts use the income statement to compare year on year and quarter on quarter performance one can infer for example whether a company s efforts at reducing the cost of sales helped it improve profits over time or whether management kept tabs on operating expenses without compromising on profitability | |
what are the four key elements of an income statement | 1 revenue 2 expenses 3 gains and 4 losses an income statement is not a balance sheet or a cash flow statement | |
what is the difference between operating revenue and non operating revenue | operating revenue is realized through a business primary activity such as selling its products non operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property | |
what insights should you look for in an income statement | the income and expense components can help an investor learn what makes a company profitable or not competitors can use them to measure how their company compares on various measures research analysts use them to compare performance year on year and quarter on quarter the bottom linean income statement provides valuable insights into various aspects of a business it includes readings on a company s operations the efficiency of its management the possible leaky areas that may be eroding profits and whether the company is performing in line with industry peers | |
what is an income stock | an income stock is a security that pays regular often steadily increasing dividends understanding an income stockincome stocks usually offer a high yield that may generate the majority of the security s overall returns while there is no specific breakpoint for classification most income stocks have lower levels of volatility than the overall stock market and offer sustainable higher than average dividend yields income stocks may have limited future growth options thereby requiring a lower level of ongoing capital investment any excess cash flow from profits can be directed back to investors on a regular basis income stocks can come from any industry but investors commonly find them within real estate through real estate investment trusts or reits energy sectors utilities natural resources and financial institutions many conservative investors seek income stocks because they want some exposure to corporate profit growth at the same time these stocks have steady streams of revenue that allow for a low risk and consistent source of revenue perhaps for investors who are older and do not have regular salaries anymore the ideal income stock would have very low volatility as measured by its beta a dividend yield higher than the prevailing 10 year treasury note t note rate and a modest level of annual profit growth ideal income stocks would also show a history of increasing dividends on a regular basis so as to keep up with inflation which eats away at future cash payments example of an income stockretail behemoth walmart inc is an example of an income stock as its stock price has risen over the last thirty years the arkansas based company has consistently increased its dividend payout 1the company s dividend yield peaked at 3 32 in 2015 and as of july 16 2021 is at 1 55 which is superior to the yield on the 10 year t note 21 it has achieved this yield despite the threat of e commerce and increased competition from amazon which has taken away its market share income stocks vs growth stockswhile many conservative investors target income stocks those able and or with the desire to take more risks are perhaps better off pursuing growth stocks in contrast with income stocks growth stocks usually do not pay dividends instead company management often prefers to reinvest retained earnings into capital projects to boost future revenues and profit for example a recently public technology firm might choose to hire a new team of engineers or put all their efforts for one or two quarters into a new product rollout which not only requires technical expertise but also marketing and sales power along with significant customer experience to reply to questions and concerns and help with troubleshooting while growth stocks can bring significant capital gains they generally also carry more risk than income stocks with growth stocks shareholders must rely on the company s investments paying off to generate a return on their investment roi if the company s growth is not as high as expected shareholders may end up losing their money as market confidence wanes and share prices drop | |
what is income tax | income tax is a type of tax governments impose on the income that businesses and individuals generate by law taxpayers must file an income tax return annually to determine their tax obligations income taxes are a source of revenue for governments they are used to fund public services and pay government obligations in addition to the federal government many states and local jurisdictions also levy income taxes certain investments like housing authority bonds are exempt from income taxes in some cases mira norian investopedia | |
how income tax works | the internal revenue service irs collects taxes and enforces tax laws in the united states the irs employs a complex set of rules and regulations regarding reportable and taxable income deductions credits etc the agency collects taxes on all forms of income such as wages salaries commissions investments and business earnings the personal income tax that the government collects can help fund government programs and services such as social security national security schools and roads history of income taxthe united states imposed the nation s first income tax in 1862 to help finance the civil war after the war the tax was repealed but it was reinstated after the passage of the revenue act of 1913 that same year form 1040 was introduced 1most countries including the u s employ a progressive income tax system in which higher income earners pay a higher tax rate compared with their lower income counterparts the idea behind progressive tax is that those who earn high incomes can afford to pay more tax for 2023 and 2024 federal income tax rates range from 10 to 37 23types of income taxindividual income tax is also referred to as personal income tax this type of income tax is levied on an individual s wages salaries and other types of income this tax is usually a tax that the state imposes because of exemptions deductions and credits most individuals do not pay taxes on all of their income the irs offers a series of income tax deductions and tax credits taxpayers can use to reduce their taxable income while a deduction can lower your taxable income and the tax rate used to calculate your tax a tax credit reduces your income tax obligation the irs offers tax deductions for healthcare expenses investments and certain education expenses for example if a taxpayer earns 100 000 in income and qualifies for 20 000 in deductions the taxable income reduces to 80 000 100 000 20 000 80 000 tax credits help reduce the taxpayer s tax obligation or amount owed they were created primarily for middle income and lower income households to illustrate if an individual owes 20 000 in taxes but qualifies for 4 500 in credits their tax obligation reduces to 15 500 20 000 4 500 15 500 4taxable income is your adjusted gross income agi minus any itemized deductions or your standard deduction 5businesses also pay income taxes on their earnings the irs taxes income from corporations partnerships self employed contractors and small businesses 6depending on the business structure the corporation its owners or shareholders report their business income and then deduct their operating and capital expenses generally the difference between their business income and their operating and capital expenses is considered their taxable business income 78all but nine u s states impose personal income taxes on their residents the ones that don t are alaska florida nevada new hampshire south dakota tennessee texas washington and wyoming 9keep in mind though that it may not necessarily be cheaper to live in a state that does not levy income taxes this is because states often make up the lost revenue with other taxes or reduced services | |
what s more other factors determine the affordability of living in a state including healthcare cost of living and job opportunities for instance florida residents pay a 6 sales tax on goods and services while the state sales tax in tennessee is 7 1011 | if you don t have a complicated tax situation a tax calculator can give you an idea of how much income tax you might owe to further complicate matters states continually adjust their tax systems in ways both large and small making it impossible to predict what sort of tax burden their residents will face in the years to come | |
what percent of income is taxed | the percent of your income that is taxed depends on how much you earn and your filing status in theory the more you earn the more you pay the federal income tax rate ranges from 10 to 37 3 | |
how can i calculate income tax | to calculate income tax you ll need to add up all sources of taxable income earned in a tax year the next step is calculating your adjusted gross income agi once you have done this subtract any deductions for which you are eligible from your agi | |
which states have no income tax | alaska florida nevada new hampshire south dakota tennessee texas washington and wyoming do not collect state income taxes 9the bottom lineall taxpayers pay federal income tax depending on where you live you may have to pay state and local income taxes too the u s has a progressive income tax system which means that higher income earners pay a higher tax rate than those with lower incomes most taxpayers do not pay taxes on all of their income thanks to exemptions and deductions | |
what is income tax payable | income tax payable is a liability reported for financial accounting purposes it shows the amount that an organization expects to pay in income taxes within 12 months it is reported in the current liabilities section on a company s balance sheet income tax payable is calculated using generally accepted accounting principles gaap using the current tax rates in the jurisdictions where the organization is subject to tax businesses operating in the united states are subject to federal state and local tax laws they must also follow the tax laws of any other countries where they operate and realize income understanding income tax payablegenerally the taxes an organization owes are included in the line income tax payable on the organization s balance sheet income tax payable is shown as a current liability to the extent of the amount that will be resolved i e paid within 12 months 1the generally accepted accounting principles gaap have rules for reporting an event producing income or loss however these differ from the tax law requirements for reporting the same event on tax returns the two systems different depreciation and amortization rules are common causes of timing differences these differences in reporting for the two systems particularly for the timing of tax liabilities are reflected in an organization s financial statements 2tax liabilities that have accrued during the year but which will be paid in a later year are shown on a balance sheet as deferred income tax liabilities for example the total us tax liability for a 2023 event resulting in income of 300 determined using the 2023 corporate federal income tax rate of 21 is 63 3gaap generally requires that all of the 300 in income from an event as well as the total corporate tax liability of 63 must be recognized in the organization s income statement for the year when the event occurred i e 2023 deferring tax liabilitytax liability may be calculated one way using gaap but reported differently for tax purposes tax law may spread recognition of income or a tax liability over multiple years this timing difference will be reflected in the financial statements for the same example if 300 of gaap income for 2023 is spread over three years for tax purposes the 2023 balance sheet will treat the taxes due the irs for 2023 as a current liability i e a current income tax payable of 21 that 21 would be reported as income tax payable on the current liabilities section of the balance sheet the remaining 42 which will be due to the irs in the future would be reported as a deferred tax liability thus a deferred tax liability arises when there is a difference between the current income tax liability reported on an organization s balance sheet and the income tax expense reported on its income statement income tax payable vs income tax expensebalance sheets report the actual amount of taxes owed to the irs categorized either as current tax liabilities income tax payable or deferred income tax liabilities noncurrent longer term liabilities however income tax expense is reported on an organization s income statements 1 this amount usually appears as the last expense item and is a deduction taken from pre tax profit in determining net income or profit for a us corporate taxpayer gaap determines the amount of income tax expense for financial reporting purposes by applying the current corporate tax rate 21 in 2023 to the amount designated as profit before income taxes on the income statement taxes other than income taxes such as payroll taxes property taxes and sales taxes may be identified on financial statements as separate tax categories they also may be included in a comprehensive tally of tax expenses on an income statement and of tax liabilities on a balance sheet upon completing its federal income tax return an organization knows the actual amount of taxes due to the us government for that tax year the taxes payable within a year are reflected on the balance sheet as current income tax liabilities taxes due in future years are listed as deferred income tax liabilities if the corporation also owes state local or foreign income taxes its balance sheet will reflect those liabilities as well | |
what does the term income tax payable mean | income tax payable is a financial accounting term for the current liability reported on an organization s balance sheet it indicates the taxes that the organization expects to pay within 12 months | |
what does income tax expense represent | income tax expense is the financial accounting term for the taxes that an organization owes on its pre tax profit the amount is determined under gaap by applying to the organization s pre tax profit the tax rate applicable under relevant laws it appears on an organization s income statement 4 | |
why do taxes owed to the irs and tax amounts on financial statements differ | on balance sheets the tax amounts indicate liabilities that affect the organization s value taxes due within 12 months are current liabilities and are designated as income tax payable taxes to be paid in the later periods are designated as deferred tax liabilities the bottom line income tax payable refers specifically to an amount reported on financial statements a liability reported in the current liabilities section of a company s balance sheet that indicates the amount that an organization expects to pay in income taxes within 12 months financial accounting rules for reporting tax liabilities and the tax code s rules for determining the amount of taxes owed to the irs for the same event can differ gaap accounting principles and the us tax code do not treat all items in the same way when calculating the tax amounts reported on financial statements and the tax liabilities reported on tax returns as a result the amount of taxes owed on an organization s tax return may not match the tax expense on its income statement for financial statements the variation in the accounting rules and reasons for determining tax expense and tax liabilities can create different amounts on income statements and balance sheets | |
what is an incontestability clause | an incontestability clause in most life insurance policies prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed a typical incontestability clause specifies that a contract will not be voidable after two or three years due to a misstatement incontestability clauses help protect insured people from firms who may try to avoid paying benefits in the event of a claim while this provision benefits the insured it cannot protect against outright fraud | |
how an incontestability clause works | the incontestability clause in life insurance policies is one of the strongest protections for a policyholder or beneficiary while many other legal rules for insurance favor the insurance companies this rule is notably and strongly on the side of the consumer conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract then the second party has the right to void or cancel the agreement the incontestability clause forbids insurance companies from doing this lying to an insurance company with an intention to deceive can result in the cancellation of coverage or even criminal charges three common exceptions to the incontestability clause | |
how incontestability clauses help consumers | errors are easy to make when applying for life insurance an insurance company will often require a complete medical history before the policy is approved if an applicant forgets a single detail the insurance company has potential grounds to deny paying life insurance benefits later on reputable insurance companies originally introduced the incontestability clause in the late 1800s to build consumer trust by promising to pay full benefits after the policy has been in place for two years even if there were errors in the original application these insurance companies tried to clean up the industry s image the effort was successful and early in the 20th century state governments began to pass laws requiring the incontestability clause 1today the clock immediately begins to run on the contestability period as soon as a life insurance policy is purchased if after two years the insurance company hasn t found an error in the original application benefits are assured even within that period it s not easy for the company to rescind a policy under most state laws the insurance company must file suit in court to nullify a contract sending a notice to the policyholder is not enough | |
what s an incontestability clause | it s a consumer protection that prevents insurance companies from ending coverage due to a misstatement by the insured after several years have passed | |
how does it protect consumers | errors are easy to make when applying for life insurance conventional rules for contracts stipulate that if false or incomplete information was provided by one party when making the contract then the second party has the right to void or cancel the agreement an insurance company will often require a complete medical history before the policy is approved if an applicant forgets a single detail the insurance company has potential grounds to deny paying life insurance benefits later on the incontestability clause prevents this from happening | |
what are a few exceptions | misstating age or gender permits the insurance company in most states to adjust death benefits to reflect the policyholder s true status a life insurance company can refuse to pay benefits if a policyholder was so unwell when they applied for coverage that they died before the contestability period was over in some states an insurer can void a policy if deliberate fraud is proven | |
what is incorporation | incorporation is the legal process used to form a corporate entity or company a corporation is the resulting legal entity that separates the firm s assets and income from its owners and investors corporations can be created in nearly all countries in the world and are usually identified as such by the use of terms such as inc or corp in their names it is the process of legally declaring a corporate entity as separate from its owners investopedia jiaqi zhouunderstanding incorporationincorporation is the broad term to describe a business registered with a state to become a separate legal entity that business entity often is owned by shareholders even if it is a corporation with a single owner that may also be overseen by a board of directors a company does not need to be incorporated to operate a business business owners may elect to operate as a sole proprietorship partnership or limited liability company llc instead these business structures treat company debt and taxes differently than compared to an incorporated entity another primary difference between legal entities and one of the most important reasons a company may want to incorporate is for the advantage of issuing stock when a company incorporates it gains the ability to share ownership of the company by issues shares of stock whereas a sole proprietorship or partnership is usually only owned by those operating the company incorporating allows a business owner to sell an ownership stake in part of the business if a business doesn t need to sell stock an llc can be a great option it offers legal protection but has pass through taxation meaning earnings are only taxed once the creation and organization of corporationsincorporation involves drafting articles of incorporation which lists the primary purpose of the business and its location along with the number of shares and class of stock being issued if any a close corporation for instance is held by a small number of shareholders and is not publicly traded companies are owned by their shareholders small companies can have a single shareholder while very large and often publicly traded companies can have several thousand shareholders as a rule the shareholders are only responsible for the payment of their own shares as owners the shareholders are entitled to receive the profits of the company usually in the form of dividends the shareholders also elect the directors of the company the directors of the company are responsible for day to day activities they owe a duty of care to the company and must act in its best interest they are usually elected annually smaller companies can have a single director while larger ones often have a board comprised of a dozen or more directors except in cases of fraud or specific tax statutes the directors do not have personal liability for the company s debts according to the u s census bureau roughly 45 000 corporations submit business licenses each month in april 2024 just over 50 900 applications from corporations were submitted 1 | |
how to incorporate a business | there are many steps to incorporating a business each with its own degree of importance below are the following decisions and actions a business owner must take to incorporate prior to incorporating a business should ensure it is adhering to local business licensing and zoning laws this includes having the appropriate permits or licenses to operate though not all businesses may require these by extension this may have implications in to where you operate and ultimately decide to incorporate it s sometimes best to incorporate in the state that the business is operating in as there are different types of applications and filing requirements to file elsewhere for example incorporating in a different state may require you to file a foreign corporation on the other hand filing in a different state may reduce the fees and reporting requirements needed to establish and maintain the corporation many companies choose to incorporate in delaware as the state does not impose income tax on entities that do not do business in the state one of the more fundamental important decisions to make is to establish the business structure the most common forms of business are a sole proprietorship partnership corporation and s corporation an llc is also a common business structure allowed by state statute while this article is focused on incorporation the process of forming a corporation readers should be aware of other entity types that may suit them better should you choose another entity your entity formation process will differ from the incorporation process a business owner should choose the business structure that makes the most strategic and operational sense for the long term as mentioned above corporations can issue stock a very easy way for owners to sell part of the business for personal profit there are also very considerable tax and liability considerations to be had based on the business structure chosen for those unaware of the best course of action it s usually recommended to consult a business attorney to discuss business structure options in this article more of the specific benefits and advantages of incorporating a business are discussed below to incorporate your business name can not be the exact same name as another corporation in your local area you also want a unique name to avoid trademark infringement and branding confusion when selecting that unique name consider that incorporated businesses often end in incorporation abbreviations i e inc there are online directories that can be used to search existing business names these directories allow users to input intended names to see whether they are available some states may offer business owners going through the incorporation process the option to reserve an available name for a period between 60 and 120 days depending on the state a registered agent is a person who has the right and ability to accept paperwork and mail on behalf of the company states will require that a company name a local registered agent as the state will need a contact of someone who will handle official business as items arise the registered agent does not need to be the business owner for example a company s business attorney can serve as a registered agent as long as they have an office within the state the business is being incorporated in should the registered agent move out of the state in which the business is incorporated in the company will need to choose a new agent there are also online legal services that can act as your registered agent in return for a fee as discussed above the articles of incorporation include many important aspects of a company including the business name location information on public or private shares the information of the registered agent and the name of the incorporator each state has its own filing requirements for the articles of incorporation there will be a filing fee to submit the article of incorporation with the state in most cases this is several hundred dollars in addition to drafting the articles of incorporation companies must draft bylaws to outline how your compensation is structured how shares are issued what voting rights are and how the board of directors operate the corporate bylaws are a more detailed set of instructions on how to operate a business very often a company may refer back to its bylaws to better clarify the best course of action to take as it runs some states won t require a copy of these but they may be required by other entities i e financial institutions may require bylaws when setting up a bank account in addition bylaws may be revised to meet the adapting nature of a business at the first initial board meeting the board members will be tasked with performing an important series of actions at that first meeting the board members should formally vote to adopt the articles of incorporation and bylaws authorize and issue shares of stock elect officers and make other operational decisions it is also important that the meeting minutes are taken as certain entities may require a copy of notes as needed there are other operational tasks a business owner should take as it becomes incorporated though independent of the actual incorporation process companies should apply for an employer identification number create a bank account file federal taxes announce the creation of your corporation if applicable and file annual reports as needed incorporation averages about 10 days to be complete but may take a few weeks 2advantages and disadvantages of incorporationincorporation effectively creates a protective bubble of limited liability often called a corporate veil around a company s shareholders and directors as such incorporated businesses can take the risks that make growth possible without exposing the shareholders owners and directors to personal financial liability outside of their original investments in the company because an incorporated business can issue and trade shares this allows for easy transfer of ownership to another party whereas a sole proprietorship must sell the entire company to financially profit from disposing of company equity owners of a company can still retain primary ownership but sell part of their shares for personal profit in addition shares traded on public exchanges are much more liquid markets compared to other means of selling a business an incorporated business may achieve a lower tax rate than on personal income incorporated businesses often receive more lenient tax restrictions on loss carryforwards and may receive more favorable tax treatment for allowable deductions the primary drawback of an incorporated business is the operating constraints to maintain its incorporated status companies must adhere to their bylaws and must ensure it meets filing reporting and other ongoing requirements an argument can be made that since an incorporated entity s tax filing is separate from any individual s there is also an administrative burden angle when preparing multiple tax returns an incorporated business normally experiences double taxation consider an example of a corporation being assessed net income tax then with after tax proceeds it makes a taxable distribution to a shareholder this shareholder now has taxable income on funds that have already been assessed a tax liability operating an incorporated may be more expensive based on the filing reporting and administrative fees companies must often meet public reporting requirements such as getting their financial statements audited there are also ongoing fees and regulatory charges to maintain their status on an exchange last an incorporated business may be considered less flexible in some ways compared to other forms of business once incorporated a business must operate in accordance to its bylaws and articles of incorporation in addition it usually now has an entire board of individuals overseeing operations it may be more difficult for the executives at an incorporated business to dramatically change business strategy or operational considerations protects owners from personal liability as the corporation is responsible for its own debtsmay be much easier to raise capital as shares can more easily be soldmay be easier for owners to personally profit by selling partial stake in company as opposed to needing to sell full ownershipmay receive some favorable tax treatment compared to other business structuresoften requires greater investment of time to meet reporting filing and regulatory requirementsfunds paid to shareholders are exposed to double taxation where both the corporation and shareholders are taxes on the same fundsmay be a more expensive type of business structure due to fees and legal costs | |
when should you start a corporation | administratively there are many benefits to changing a legal entity s status effective january 1 this change is the cleanest from a tax perspective operationally it may make more sense to convert a company to a corporation when it is ready to raise more capital and make it easier for investors to infuse capital into the company | |
do i need to pay myself after i incorporate | there are tax considerations to make regarding paying yourself a wage or salary as business owner as opposed to taking a draw or equity distribution you are not required to do either when you incorporate you may want to consider double taxation when deciding whether to pay yourself or not remember income is taxed when a corporation earns it and again when it s paid out to the owners so if you d like to delay the personal income taxes on the money it may be wise to only pay yourself when needed can an individual be a corporation the simple answer is yes a corporation can consist of just one person s corps and c corps are popular options for corporations with one or a small number of owners a regular corporation can also be just one person however llcs are often a better option when there is just one owner they can even elect for s corp taxation if it s advantageous to them the bottom linefor more complex companies looking to raise more capital have the owners avoid personal liability and gain certain tax incentives companies can opt to incorporate and operate using a different operating structure though incorporating is more expensive and requires more time to handle administrative manners there are long term strategic advantages to moving on from being a sole proprietor or partnership | |
what are incoterms | to facilitate commerce around the world the international chamber of commerce icc publishes a set of incoterms officially known as international commercial terms globally recognized incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers parties involved in domestic and international trade commonly use incoterms as a kind of shorthand to help understand one another and the exact terms of their business arrangements some incoterms apply to any means of transportation while others apply strictly to transportation across water understanding incotermsthe international chamber of commerce icc developed incoterms in 1936 and updates them periodically to conform to changing trade practices 1 the icc s mission is to promote open markets and ensure global economic prosperity through trade because the icc is a networked business organization that reaches more than 45 million companies in more than 100 countries it is seen as having unparalleled expertise in establishing rules to guide international trade 4 while adherence to its incoterms is voluntary the icc established rules are commonly used by buyers and sellers as a regular part of trade transactions incoterms provide a universal set of rules and guidelines that help facilitate trade in essence they provide a common language that traders can use to set the terms for their trades buyers and sellers can use incoterms in a variety of activities necessary to conduct business typical activities that call for the use of incoterms include filling out a purchase order labeling a shipment for transport completing a certificate of origin or documenting a free carrier agreement fca 2because the icc regularly updates incoterms contracts should specify which version they are using e g incoterms 2020 also be aware that trade terms used in different countries may appear identical on the surface but they can have different meanings when used domestically incoterms rules for any mode of transportsome common examples of incoterms rules for any mode of transportation include delivered duty paid ddp delivered at place dap and ex works exw the seven incoterms for any mode of transport are dpu for example indicates that the seller delivers the goods to a terminal and assumes all the risk and transportation costs until the goods have arrived and been unloaded after that the buyer assumes the risk and transportation costs of the goods from the terminal to the final destination 2ddp indicates that the seller assumes all the risk and transportation costs the seller must also clear the goods for export at the shipping port and import at the destination moreover the seller must pay export and import duties for goods shipped under ddp 2under incoterm ex works exw the seller is only required to make the goods available for pickup at the seller s business location or another specified location under exw the buyer assumes all the risk and transportation costs 2in 2010 the two main categories of incoterms were updated and classified by modes of transport the first classification applies to any mode of transport while the second classification only applies to sea and inland waterway transport 5incoterms rules for sea and inland waterway transportthe icc has specific incoterms rules for inland waterway and sea transport such as cost insurance and freight cif and free on board fob the incoterms for sea and inland waterway transport are free on board fob shipment terms for example indicate that the seller delivers the goods on board a designated vessel named by the buyer the buyer or seller may assume all the risk and transportation costs depending on whether the goods are sold under the fob shipping point or fob destination point 2cost insurance and freight cif terms indicate that the seller must deliver the goods to a designated port and load them on a specified vessel assuming responsibility for paying all transportation insurance and loading costs after that the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business 2 | |
what do incoterms not cover | there are specific instances that incoterms will not cover incoterms do not due to the omission of certain sale conditions working only with incoterms can be constricting all parties involved in any contract should make sure that the applicable instances above are addressed before signing the contract this ensures a smooth business transaction as many legal matters can arise when the parties are working only with incoterms incoterms 2010 vs incoterms 2020although the 2010 incoterms were updated in 2020 there are no significant differences in the naming conventions between the two there was only one change in terminology the 2010 term delivered at terminal dat was clarified to the 2020 term delivered at place unloaded dpu this was done to include all places of unloading not just those in terminals in both instances there are 11 terms 3things become more involved when you move past the terms themselves for example the amount of freight insurance required under the cip term has been increased however this does not affect the cif term 3incoterms 2020 covers situations where either the buyer or seller transports goods using their own vehicles in 2010 it was assumed that these services were provided by a third party carrier and there is a change in the way that the fca rule is used in conjunction with a letter of credit 35in addition security related cost responsibilities have changed these can be associated with export clearance processes as well as the import clearance process the incoterms revision clarified that the most common cost headings are those associated with transport that are the responsibility of the arranging party security costs associated with export clearance will be borne by the seller other than for ex works cases security costs associated with import will be borne by the buyer except for ddp cases 23advantages and disadvantages of incotermsthe single greatest advantage of using incoterms is the standardization and specificity of complicated international trade aspects having a system that eliminates ambiguity between nations has made trading much simpler especially when negotiating terms this saves time and money that would have previously been spent on lawyers who would draft terms basically breaking down incoterms into different languages a notable disadvantage of incoterms is that buyers and sellers often have different preferences when using them sellers for example may choose cif because they understand their shipments better than buyers do buyers in contrast may prefer fob for the same reasons however the terms themselves are not the issue and it becomes more a matter of negotiation over which terms to use vs the clarity of the terms themselves easily understood termsinternational standardizationupdated and clarified by an international body icc differences between buyer and seller preferences when choosing termscertain terms can expose one party to inflated costscan i still use incoterms 2010 after jan 1 2020 yes it is still acceptable to use the 2010 incoterms however both buyer and seller should agree in writing to use either the 2010 or 2020 incoterms version 2 | |
what are the 11 incoterms | the 11 incoterms are carriage and insurance paid to cip carriage paid to cpt cost and freight cfr cost insurance and freight cif delivered at place dap delivered at place unloaded dpu delivered duty paid ddp ex works exw free alongside ship fas free carrier fca and free on board fob 2 | |
why are incoterms used | incoterms are used to clarify business terms in international trade the many benefits of incoterms outweigh the negatives for most transactions which is why many trade agreements are facilitated using incoterms there are still preferences between parties and the terms themselves must be negotiated before an agreement is finalized the bottom lineincoterms are helpful terms used to facilitate international trade they are separated by modes of transport between any mode and those specifically involving water transport the terms categorize responsibility between the buyer and seller but there are some aspects of trade that the terms do not cover such as the goods being sold or future liability responsibilities for this reason incoterms should be used to help clarify agreements but should not be the entirety of the agreement | |
what is incremental analysis | incremental analysis is a decision making tool used in business to determine the true cost difference between alternative business opportunities also called marginal analysis the relevant cost approach or differential analysis incremental analysis disregards any sunk cost past cost incremental analysis is useful when a company works on its business strategies including the decision to self produce or outsource a process job or function understanding incremental analysisincremental analysis is a problem solving method that applies accounting information with a focus on costs to strategic decision making the use of incremental analysis can help businesses identify the potential financial outcomes of one business action or opportunity compared to another with that information management can make better informed decisions that can affect profitability relevant costs also called incremental costs are incurred only when a particular activity has been initiated or increased non relevant sunk costs are expenses that already have been incurred because the sunk costs are present regardless of any opportunity or related decision they are not included in incremental analysis incremental analysis models include only relevant costs and typically these costs are broken into variable costs and fixed costs incremental analysis also considers opportunity costs the financial implications of a missed opportunity when choosing one alternative over another to ensure that a company is aware of and can pursue its most favorable option uses for incremental analysiscompanies use incremental analysis to decide whether to accept additional business make or buy products sell or process products further eliminate a product or service and decide how to allocate resources example of incremental analysisthe acme company sells a particular item for 300 the company pays 125 for labor 50 for materials and 25 for variable overhead selling expenses the company also allocates 50 per item for fixed overhead costs the company is not operating at capacity and will not be required to invest in equipment or overtime to accept any special order that it may receive then a special order arrives requesting the purchase of 15 items at 225 each the sum of all variable costs and fixed costs per item is 250 however the 50 of allocated fixed overhead costs are a sunk cost and are already spent the company has excess capacity and should only consider the relevant costs therefore the cost to produce the special order is 200 per item 125 50 25 the profit per item would be 25 225 200 while the company is able to make a profit on this special order the company must consider the ramifications of operating at full capacity if no excess capacity is present additional expenses to consider include investment in new fixed assets overtime labor costs and the opportunity cost of lost sales incremental analysis only focuses on the differences between particular courses of action these differences not the similarities form the basis of the analysis comparison | |
what is the benefit of incremental analysis | a primary benefit of its examination of costs is that it can help a business make the best use of available resources and maintain a focus on profitability | |
what costs does incremental analysis involve | it examines relevant costs and opportunity costs it also takes into account sunk or non relevant costs and excludes those from analysis | |
what s a limitation of incremental analysis | one aspect that companies must be aware of is the potential for cost assumptions to be wrong every effort must be made to make correct cost estimates so that the choice of an opportunity that a business ultimately makes doesn t affect the company negatively the bottom lineincremental analysis is a crucial decision making tool that can help businesses better understand their costs utilize resources efficiently and maximize profit its focus on true costs including opportunity costs and its stripping away of irrelevant information can reveal in a less effort intensive amount of time the most cost effective options for companies to choose from to reach important financial goals | |
what is the incremental capital output ratio icor | the incremental capital output ratio icor is a frequently used tool that explains the relationship between the level of investment made in the economy and the subsequent increase in the gross domestic product gdp icor indicates the additional unit of capital or investment needed to produce an additional unit of output understanding the incremental capital output ratio icor icor is a metric that assesses the marginal amount of investment capital necessary for a country or other entity to generate the next unit of production overall a higher icor value is not preferred because it indicates that the entity s production is inefficient the measure is used predominantly in determining a country s level of production efficiency some critics of icor have suggested that its uses are restricted because there is a limit to how efficient countries can become based on available technology for example a developing country can theoretically increase its gdp by a greater margin with a set amount of resources than its developed counterpart can this is because the developed country is already operating with the highest level of technology and infrastructure whereas a developing country has room to improve any further improvements in a developed country would have to come from more costly research and development r d whereas the developing country can implement existing technology to better its situation icor can be calculated as i c o r annual investment annual increase in gdp icor frac text annual investment text annual increase in gdp icor annual increase in gdpannual investment for example suppose that country x has an incremental capital output ratio icor of 10 this implies that 10 worth of capital investment is necessary to generate 1 of extra production furthermore if country x s icor was 12 last year this implies that country x has become more efficient in its use of capital limitations of the incremental capital output ratio icor for advanced economies accurately estimating icor is subject to many issues a primary complaint of critics is its inability to adjust to the new economy an economy ever more driven by intangible assets such as design branding research and development r d and software which are difficult to measure or record intangible assets are more challenging to factor into investment levels and gdp than tangible assets like machinery buildings and computers on demand options such as software as a service saas have greatly driven down the need for investments in fixed assets this can be extended even further with the rise of as a service models for nearly everything it all adds up to businesses increasing their production levels with items that are now expensed and not capitalized and thus considered an investment example of the incremental capital output ratio icor between 1947 and 2017 the indian economy was premised on the concept of planning and carried out through the five year plans the 12th five year plan of the government of india was india s final five year plan the planning commission of india determined the required rate of investment that would be needed to achieve different growth outcomes in the 12th five year plan for a growth rate of 8 the investment rate at market price would need to be at 30 5 while for a growth rate of 9 5 an investment rate of 35 8 would be required 1 investment rates in india dropped from the level of 36 8 of the gross domestic product gdp in the year 2007 to 2008 to 30 8 from 2012 to 2013 the rate of growth during the same period fell from 9 6 to 6 2 2 clearly the drop in india s growth during this period was more dramatic and steeper than the fall in the investment rates therefore there must have been reasons beyond savings and investment rates that would explain the drop in the rate of growth in the indian economy otherwise the economy is getting increasingly inefficient in 2019 india s gdp growth rate was 4 23 and its rate of investments as a percentage of gdp was 30 21 3 | |
what is incremental cost of capital | incremental cost of capital is a capital budgeting term that refers to the average cost a company incurs to issue one additional unit of debt or equity the incremental cost of capital varies according to how many additional units of debt or equity a company wishes to issue being able to accurately calculate cost of capital and the incremental effects of issuing more equity or debt can help businesses reduce their overall financing costs understanding incremental cost of capitalthe cost of capital refers to the cost of funds a company needs to finance its operations a company s cost of capital depends on the mode of financing used it refers to the cost of equity if the business is financed via equity or to the cost of debt if it is financed via debt issuance companies often use a combination of debt and equity issuance to finance their operations as such the overall cost of capital is derived from a weighted average of all capital sources widely known as the weighted average cost of capital wacc as the cost of capital represents a hurdle rate that a company must overcome before it can generate value it is extensively used in the capital budgeting process to determine whether the company should proceed with a project via debt or equity financing the incremental aspect of incremental cost of capital refers to how a company s balance sheet is effected by issuing additional equity and debt with each new issuance of debt a company may see its borrowing costs increase as seen it the coupon it has to pay investors to buy its debt the coupon is a reflection of a company s creditworthiness or risk as well as market conditions incremental cost of capital is the weighted average cost of new debt and equity issuances during a financial reporting period | |
when a company s incremental cost of capital rises investors take it as a warning that a company has a riskier capital structure investors begin to wonder whether the company may have issued too much debt given their current cash flow and balance sheet a turning point in the rise of a company s incremental cost of capital happens when investors avoid a company s debt due to worries over risk companies may then react by tapping the capital markets for equity funding unfortunately this can result in investors pulling back from the company s shares due to worries over the debt load or even dilution depending on how additional capital is to be raised | incremental cost of capital and composite cost of capitalincremental cost of capital is related to composite cost of capital which is a company s cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on composite cost of capital may also be known as weighted average cost of capital the wacc calculation is frequently used to determine the cost of capital where it weights the cost of debt and equity according to the company s capital structure a high composite cost of capital indicates that a company has high borrowing costs a low composite cost of capital signifies low borrowing costs | |
what is incremental cash flow | incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project a positive incremental cash flow means that the company s cash flow will increase with the acceptance of the project a positive incremental cash flow is a good indication that an organization should invest in a project investopedia jessica olahunderstanding incremental cash flowthere are several components that must be identified when looking at incremental cash flows the initial outlay cash flows from taking on the project terminal cost or value and the scale and timing of the project incremental cash flow is the net cash flow from all cash inflows and outflows over a specific time and between two or more business choices for example a business may project the net effects on the cash flow statement of investing in a new business line or expanding an existing business line the project with the highest incremental cash flow may be chosen as the better investment option incremental cash flow projections are required for calculating a project s net present value npv internal rate of return irr and payback period projecting incremental cash flows may also be helpful in the decision of whether to invest in certain assets that will appear on the balance sheet example of incremental cash flowas a simple example assume that a business is looking to develop a new product line and has two alternatives line a and line b over the next year line a is projected to have revenues of 200 000 and expenses of 50 000 line b is expected to have revenues of 325 000 and expenses of 190 000 line a would require an initial cash outlay of 35 000 and line b would require an initial cash outlay of 25 000 to calculate each project s net incremental cash flow for the first year an analyst would use the following formula icf revenues expenses initial cost where begin aligned text icf text revenues text expenses text initial cost textbf where text icf text incremental cash flow end aligned icf revenues expenses initial costwhere in this example the incremental cash flows for each project would be la icf 2 0 0 0 0 0 5 0 0 0 0 3 5 0 0 0 1 1 5 0 0 0 lb icf 3 2 5 0 0 0 1 9 0 0 0 0 2 5 0 0 0 1 1 0 0 0 0 where la line a incremental cash flow begin aligned text la icf 200 000 50 000 35 000 115 000 text lb icf 325 000 190 000 25 000 110 000 textbf where text la text line a incremental cash flow text lb text line b incremental cash flow end aligned la icf 200 000 50 000 35 000 115 000lb icf 325 000 190 000 25 000 110 000where la line a incremental cash flow even though line b generates more revenue than line a its resulting incremental cash flow is 5 000 less than line a s due to its larger expenses and initial investment if only using incremental cash flows as the determinant for choosing a project line a is the better option limitations of incremental cash flowthe simple example above explains the idea but in practice incremental cash flows are extremely difficult to project besides the potential variables within a business that could affect incremental cash flows many external variables are difficult or impossible to project market conditions regulatory policies and legal policies may impact incremental cash flow in unpredictable and unexpected ways another challenge is distinguishing between cash flows from the project and cash flows from other business operations without proper distinction project selection can be made based on inaccurate or flawed data | |
what is incremental cost | incremental cost is the total cost incurred due to an additional unit of product being produced incremental cost is calculated by analyzing the additional expenses involved in the production process such as raw materials for one additional unit of production understanding incremental costs can help companies boost production efficiency and profitability jake shi investopediaunderstanding incremental costsince incremental costs are the costs of manufacturing one more unit the costs would not be incurred if production didn t increase incremental costs are usually lower than a unit average cost to produce incremental costs incremental costs are always composed of variable costs which are the costs that fluctuate with production volumes incremental costs might include the following in other words incremental costs are solely dependent on production volume conversely fixed costs such as rent and overhead are omitted from incremental cost analysis because these costs typically don t change with production volumes also fixed costs can be difficult to attribute to any one business segment incremental costs are often referred to as marginal costs benefits to incremental cost analysisunderstanding incremental costs can help a company improve its efficiency and save money incremental costs are also useful for deciding whether to manufacture a good or purchase it elsewhere understanding the additional costs of increasing the production of a good is helpful when determining the retail price of the product companies look to analyze the incremental costs of production to maximize production levels and profitability only the relevant incremental costs that can be directly tied to the business segment are considered when evaluating the profitability of a business segment analyzing production volumes and the incremental costs can help companies achieve economies of scale to optimize production economies of scale occur when increasing production leads to lower costs since the costs are spread out over a larger number of goods being produced in other words the average cost per unit declines as production increases the fixed costs don t usually change when incremental costs are added meaning the cost of the equipment doesn t fluctuate with production volumes incremental costs are relevant in making short term decisions or choosing between two alternatives such as whether to accept a special order if a reduced price is established for a special order then it s critical that the revenue received from the special order at least covers the incremental costs otherwise the special order results in a net loss incremental cost is also known as marginal cost incremental cost vs incremental revenueincremental costs help to determine the profit maximization point for a company or when marginal costs equal marginal revenues if a business is earning more incremental revenue or marginal revenue per product than the incremental cost of manufacturing or buying that product then the business earns a profit alternatively once incremental costs exceed incremental revenue for a unit the company takes a loss for each item produced therefore knowing the incremental cost of additional units of production and comparing it with the selling price of these goods assists in meeting profit goals example of incremental costlet s say as an example that a company is considering increasing its production of goods but needs to understand the incremental costs involved below are the current production levels as well as the added costs of the additional units as a result the total incremental cost to produce the additional 2 000 units is 30 000 or 330 000 300 000 the reason why there s a lower incremental cost per unit is due to certain costs such as fixed costs remaining constant although a portion of fixed costs can increase as production increases the cost per unit usually declines since the company isn t buying additional equipment or fixed costs to produce the added volume | |
how does understanding incremental costs help companies | understanding incremental costs can help companies boost production efficiency and profitability it also helps a firm decide whether to manufacture a good or purchase it elsewhere | |
what do incremental costs include | incremental costs might include incremental costs depend solely on production volume they are always composed of variable costs which are the costs that fluctuate with production volume | |
where are incremental costs relevant | incremental costs are relevant in making short term decisions or choosing between two alternatives such as whether to accept a special order the bottom lineincremental cost is how much money it would cost a company to make an additional unit of product analyzing incremental costs helps companies determine the profitability of their business segments | |
what is an incumbency certificate | an incumbency certificate also called a certificate of incumbency or a form of incumbency is an official document issued by a corporation or a limited liability company llc that lists the names of its current directors officers and occasionally key shareholders it specifies who holds which positions within the organization and is most frequently used to confirm the identity of individuals who are authorized to enter into legally binding transactions on the company s behalf 1 outside of the united states it may also be known as a register of directors certificate of officers or secretary certificate investopedia yurle villegas | |
what information is on an incumbency certificate | whatever the name used incumbency certificates essentially provide the same information all relevant particulars regarding the company s directors officers and key shareholders 2 these can vary but can include the incumbent s name position status either elected or appointed and term of office it also usually includes a signature sample for comparison purposes a typical incumbency certificate may be worded as follows this mention would then be followed by a list of the directors and officers the date and the secretary s signature | |
how to issue an incumbency certificate | an incumbency certificate is issued by the corporate secretary often bears the corporate seal and may be notarized by a notary public because the secretary is the officer in charge of keeping company records the incumbency certificate is an official act of the company and third parties can reasonably rely on its accuracy | |
when to use an incumbency certificate | an incumbency certificate can be requested by a financial institution when the company applies to open a bank account or initiates a major transaction also the certificate could be requested by an attorney or anyone else who wants to confirm the legality and stated position of a director or an officer within the corporation anyone who is involved in a transaction with a company and needs to confirm the stated position of an officer within it may request an incumbency certificate in practice it is often required by a bank or other financial institution when opening an account to ensure that the person who claims to be the authorized signatory of a company is indeed authorized similarly when attorneys are drafting contracts for transactions involving companies they usually require an official incumbency certificate to determine who can legally bind the company in the contracts example of an incumbency certificatealthough they may take various forms a typical boilerplate incumbency certificate will look similar to the following the undersigned secretary assistant secretary of a corporation hereinafter corporation hereby certifies as follows 1 that he she is the duly elected qualified and acting secretary assistant secretary of the corporation and is charged with maintaining the records minutes and seal of the corporation 2 that pursuant to the corporation s bylaws as amended the following named person s was were designated and appointed to the office s indicated below and that said person s does do continue to hold such office s at this time and the signature s set forth opposite the name s are genuine signatures 3 that pursuant to the corporation s bylaws as amended and certain resolutions adopted by the corporation s board of directors the person s designated to serve in the above titled capacity was were given sufficient authority to act on behalf of and to bind the corporation with respect to transactions involving the leasing of equipment including without limitation the sale and leaseback of such equipment and that the execution by said person s of documents related to such transactions including without limitation master lease agreements and equipment schedules thereto constitute a legally binding and enforceable obligation of the corporation 4 that pursuant to the corporation s bylaws as amended the undersigned has the power and authority to execute this certificate on behalf of the corporation and that he she has so executed this certificate and set the seal of the corporation this day of 20 signature seal | |
name | title | |
what is a form of incumbency | a form of incumbency is just another name for incumbency certificate it provides necessary information as to a company s directors and officers and sometimes its key shareholders who signs an incumbency certificate an incumbency certificate is issued by the company s corporate secretary who must sign it if the secretary s incumbency must be certified it is co signed by one of the company officers 1 it also often includes the signatures of the directors officers and key shareholders listed on it to signify that their signatures are genuine | |
is a certificate of incumbency the same as a corporate resolution | a corporate resolution according to cornell law school s legal information institute is a written legal document issued by the board of directors of a corporation documenting a binding decision made on behalf of the corporation thus an incumbency certificate is an example of a corporate resolution but not all corporate resolutions are incumbency certificates 3the bottom linean incumbency certificate is a valuable tool for identifying who is legally allowed to represent a company in a business transaction a form of corporate resolution it is considered an official act of the company because it is issued by the company s corporate secretary allowing those doing business with the company to rely on its accuracy it makes business transactions safe | |
what is an incumbent | the term incumbent refers to an individual who currently holds a set of responsibilities within a specific office as part of a corporation or within a branch of the government as the incumbent this person has an obligation to the position or office they hold all incumbents of an organization such as directors and officers are listed on an incumbency certificate 1 an incumbent may also refer to the obligation itself or to the sense of duty surrounding the accomplishment of a particular task or objective understanding incumbentsthe word incumbent has several different meanings depending on the context in which it s used it most commonly refers to a person with a position in a specific office whether they are part of a company or an elected official this person has certain responsibilities that come with their position business leaders such as chief executive officers ceos are incumbents of a company while a senator is a political incumbent the term incumbent can also be used to describe the duties a particular individual is required to perform or the obligation they must satisfy it can also refer to a company that is powerful with a large portion of its industry s market share further the term incumbent can be related to various business standings and relationships as noted above companies list their leaders on an incumbency certificate these leaders include current directors officers and may also include main shareholders 1 this certificate is considered an official company act just like an annual report as such third parties including shareholders are able to rely on it being accurate examples of incumbentsan incumbent in business most commonly refers to a leader in the industry while it may normally refer to a person that isn t always the case it can also be used to describe a company or a product as well a company may for instance possess the largest market share or may have additional sway within the industry in business market leading companies should have the incumbent s advantage which is a deeper insight into the needs of customers than competitors a stronger understanding of profitability in regards to meeting those needs and that the knowledge of their needs and the profitability is less open to imitation than the uniqueness of their product or service 2as such incumbents in an industry may change in response to changes in the market for example blackberry producer research in motion was once considered an incumbent of the smartphone market up until apple s iphone replaced it as the incumbent based on worldwide sales 3an incumbent can also refer to business relationships such as those between a supplier providing materials to a different business the supplier currently in use is considered the incumbent due to the associations of the supplier holding the position if a new supplier wants to take over the duties of the current supplier the new supplier is a challenger to the current supplier s incumbency | |
when referring to a position in politics the incumbent is the individual who currently holds the office or position while the term applies to the person holding the position at all times it is more commonly used during elections as a way to differentiate two candidates in cases where the current position holder is running for a second term the person running against the incumbent is often referred to as the challenger | holding the incumbent position may be seen as advantageous depending on the current sentiment of the associated constituents if the constituents feel current circumstances are acceptable there may be a higher inclination to vote for the incumbent if the constituents disapprove of the situation resulting from the incumbent s policies or actions they may be less inclined to vote for them incumbents are not required to attempt to maintain the position they currently hold though they do maintain the title until the day they step down from office if a new position is created and no one has stepped into the position prior to the first election there is no incumbent for the position special considerationscertain offices in the u s government have term limits when an incumbent must be up for re election some of these have life term limits meaning that once the full term limit has been met an individual cannot run for that office again in the u s the president has a term limit of four years where they can be re elected to serve another four years a president can serve a maximum of eight years in their lifetime 4the 22nd amendment to the u s constitution was passed in 1947 and ratified in 1951 it limits the term of the president to two terms in office for a total of eight years 5members of congress are split into senators and members of the house of representatives senators serve six year terms and then are up for re election while members of the house serve two year terms and then are up for re election neither the senate nor the house has life term limits meaning that they can serve again and again 6the purpose of having term limits is to prevent one individual from exerting so much control over a nation over an extended period of time as well as giving the citizens the right to change their leadership if they are no longer happy with who is elected this is a crucial point to the democratic framework of the united states many critics have argued that government representatives spend a significant portion of their time on re election campaigns and working to get re elected rather than on the actual responsibilities of the role or rather that re election takes away time from the responsibilities many arguments have been made to adjust term limits the election process and how candidates receive donations | |
which incumbent presidents lost their second term | the incumbent presidents that lost their second term are john adams john quincy adams martin van buren franklin pierce benjamin harrison william taft herbert hoover jimmy carter george bush sr and donald trump 7 | |
what advantages does the incumbent candidate have | the advantages that an incumbent candidate has include being a known quantity their name is known their personality their beliefs and their opinions the knowledge of running a successful campaign an air of success established donors the risk aversion of voters and control over certain areas of the government | |
do incumbents win re election more often | yes incumbents win re election more often in 2023 94 of incumbents across the nation won re election in general elections in fact the incumbent win rate was at 90 or above in all states except for colorado connecticut georgia kansas minnesota new hampshire and ohio 8the bottom linean incumbent is an individual that holds a specific position with known responsibilities most commonly an incumbent refers to a person holding a current office in politics however it also applies to certain positions in a corporation relationships in business as well as a company that is the market leader of an industry | |
what is incurred but not reported ibnr | incurred but not reported ibnr is a type of reserve account used in the insurance industry as the provision for claims and or events that have transpired but have not yet been reported to an insurance company in ibnr situations an actuary will estimate potential damages and the insurance company may decide to set up reserves to allocate funds for the expected losses to an actuary these types of events and losses are said to have been incurred but not reported | |
how incurred but not reported ibnr works | ibnr is frequently used by insurance companies particularly along the east and gulf coasts of the united states where hurricanes and other natural disasters are common after a storm hits actuaries estimate the potential damage to infrastructure and the claims that may be anticipated based on this analysis money is then set aside in a reserve to pay for claims again in this example the actual losses have been incurred but have not officially been reported there are numerous scenarios that can conspire and make it necessary for insurance companies to maintain funding provisions for ibnr claims for example the potential impact of slowly developing occupational disease claims on workers compensation claims such examples include silicosis asbestosis and certain cancers determined to be related to occupational exposures defective product or product liability claims often have delayed reporting such as lead based paint asbestos insulation and defective drywall poor environmental practices can also result in delayed reporting of environmental liability claims finally short term workers compensation injuries and healthcare claims to a group healthcare plan can experience delayed reporting it is very important to understand how insurance carriers use ibnr to calculate your account s performance delayed reporting impacts several types of insurance coverages which require an ibnr calculation these include workers compensation environmental pollution healthcare general liability and products liability determining the right and proper formula for calculating an appropriate ibnr has always been one of the toughest challenges of the insurance industry insurance claim variables are non normally distributed which makes estimating them problematic and not getting it right is not without consequence inaccurate estimates can project an incorrect view of an insurer s health and may result in action being taken that could be detrimental to the company at a minimum an actuary would likely use this client data to calculate ibnr | |
what is indemnity insurance | the term indemnity insurance refers to an insurance policy that compensates an insured party for certain unexpected damages or losses up to a certain limit usually the amount of the loss itself insurance companies provide coverage in exchange for premiums paid by the insured parties these policies are commonly designed to protect professionals and business owners when they are found to be at fault for a specific event such as misjudgment or malpractice they generally take the form of a letter of indemnity investopedia nono flores | |
how indemnity insurance works | indemnity is a comprehensive form of insurance compensation for damages or loss in a legal sense it may also refer to an exemption from liability for damages the insurer promises to make the insured party whole again for any covered loss in exchange for premiums the policyholder pays indemnity insurance is a supplemental form of liability insurance specific to certain professionals or service providers insurance professionals provide counsel expertise or specialized services also referred to as professional liability insurance indemnity insurance is nothing like general liability or other forms of commercial liability insurance that protect businesses against claims of bodily harm or property damage indemnity insurance protects against claims arising from possible negligence or failure to perform that result in a client s financial loss or legal entanglement a client who suffers a loss can file a civil claim in response the professional s indemnity insurance will pay litigation costs as well as any damages awarded by the court as with any other form of insurance indemnity insurance covers the costs of an indemnity claim including but not limited to court costs fees and settlements the amount covered by insurance depends on the specific agreement and the cost of the insurance depends on many factors including the history of indemnity claims typical examples of indemnity insurance include professional insurance policies like malpractice insurance and errors and omissions insurance e o these special insurance policies indemnify or reimburse professionals against claims made as they conduct their business special considerationscertain professionals are strongly advised to carry indemnity insurance these professionals include those involved in financial and legal services such as financial advisors insurance agents accountants mortgage brokers and attorneys when dispensing financial or legal advice these professionals are potentially liable for negligence or inadequate performance despite the intent of goodwill in the financial industry a professional who provides financial advice that results in the purchase of an insurance or investment product can purchase errors and omissions insurance to protect themselves if the advice given causes damages for example accountants may be found negligent for advising a client on tax matters that in turn result in a penalty or additional taxes indemnity insurance also covers court costs fees and settlements in addition to an indemnity claim in the medical field malpractice insurance is a form of professional indemnity insurance malpractice insurance protects medical practitioners from civil claims arising from negligence that results in physical or mental harm to patients medical malpractice insurance is required in some states but optional in most many executives purchase indemnity insurance to protect their deferred compensation plans against company claims or bankruptcy other professions such as contractors consultants and maintenance professionals carry indemnity insurance as a practical matter due to their exposure to failure to perform claims professional indemnity insurance provides a critical layer of protection for service providers often these professionals might also need other forms of liability coverage such as general liability insurance or product liability coverage those purchasing indemnity policies can also add endorsements an endorsement is an add on that expands or enhances the coverage in some way indemnity insurance vs life insuranceboth indemnity and life insurance policies provide coverage for losses to an insured party in exchange for premiums up to a certain limit life insurance though provides a lump sum payout to the named beneficiaries when an insured party dies unlike indemnity insurance the payout referred to as a death benefit is the full amount of the policy not for the amount of a claim itself here s a simple example of how life insurance works let s say mr brown takes out a life 250 000 life insurance policy and names his wife as the beneficiary he pays monthly premiums on the policy to the insurance company a decade later mr brown dies in a car accident after processing the paperwork the insurance company issues mr brown s wife a payout for the policy amount 250 000 she may also receive extra money since he died in an accident if the policy has a clause with an accidental death benefit or if a rider for one was added | |
what is professional indemnity insurance | professional indemnity insurance is a type of insurance that protects a business owner or professional if a client alleges that the business behaved negligently or failed to perform work adequately this is different from general liability insurance the type of insurance that protects a business in the event of an accidental injury on its premises | |
what is hospital indemnity insurance | hospital indemnity insurance is a type of supplemental insurance that pays for hospitalization costs that are not covered by other insurance this type of insurance is frequently taken out by businesses in case their employees are injured on the job | |
what is a fixed indemnity insurance plan | fixed indemnity insurance is a type of health insurance that pays out a fixed benefit for each healthcare event regardless of the actual costs insured a fixed indemnity plan might pay a certain amount of money for each hospital admission or a certain amount for each day of hospitalization these plans are exempt from the affordable care act the bottom lineindemnity insurance represents an important protection for businesses and professionals in the event that a customer is dissatisfied with the company s work this type of insurance will pay for the insured s legal defense and defray any settlement costs this type of insurance is frequently used by doctors lawyers and other experts to protect against claims of negligence or malpractice | |
what is an indenture | indenture refers to a legal and binding agreement contract or document between two or more parties traditionally these documents featured indented sides or perforated edges historically indenture has also referred to a contract binding one person to work for another for a set period of time indentured servant particularly european immigrants in modern day finance the word indenture most commonly appears in bond agreements real estate deals and some aspects of bankruptcies indenture explainedindenture is a term that originated in england 1 in the u s there can be several types of indentures all typically involved with debt agreements real estate or bankruptcy types of indenturesbelow are some of the common types of indentures and clauses that may be associated with indenture contracts in real estate an indenture is a deed in which two parties agree to continuing obligations for example one party may agree to maintain a property and the other may agree to make payments on it in bankruptcy law an indenture may be referenced as proof of a claim on property indentures in general provide details on collateralized property constituting the claim a lender has against a debtor usually secured with a lien on the debtor s property a credit indenture is the underlying contract agreement that details all of the provisions and clauses associated with a credit offering in unsecured uncollateralized bond offerings these indentures can also be called debentures typically a credit indenture is used for the sake of bond issuers and bondholders it specifies the important features of a bond such as its maturity date the timing of interest payments method of interest calculation callability and convertible features if applicable a bond indenture also contains all the terms and conditions applicable to the bond issue other critical information included in the indenture are the financial covenants that govern the issuer and the formulas for calculating whether the issuer is within the covenants usually ratios based on corporate financials should a conflict arise between the issuer and bondholder the indenture is the reference document utilized for conflict resolution in the fixed income market an indenture is hardly ever referred to when times are normal but the indenture becomes the go to document when certain events take place such as if the issuer is in danger of violating a bond covenant the indenture is then scrutinized closely to make sure there is no ambiguity in calculating the financial ratios that determine whether the issuer is abiding by the covenants in a credit offering a closed end indenture clause may be used to detail any collateral involved that provides backing for the offering closed end indentures include collateral as well as provisions that ensure the collateral may only be assigned to one specific offering other terms that may also be associated with credit indenture clauses can include open end indenture subordinated callable convertible and non convertible in some credit indentures a trustee may be hired by a bond issuer when a trustee is involved a trust indenture will also be needed a trust indenture is similar to a bond indenture except it also details the trustee s responsibilities in overseeing all of a bond issue s terms an indenture trustee handles fiduciary duties related to credit issuance these professionals monitor interest payments redemptions and investor communications they may also lead trust departments at institutions essentially their role is to oversee and administer all of the terms clauses and covenants of an indenture issued by a company or government agency | |
what is indentured servitude | indentured servitude is a form of labor where an individual is under contract to work without a salary to repay an indenture or loan within a certain timeframe indentured servitude was popular in the united states in the 1600s as many european immigrants worked in exchange for the price of passage to america today indentured servitude is illegal in the u s and banned in nearly all countries 1understanding indentured servitudeindentured servitude served as a type of barter system for many immigrants an individual who sought a new life in america but who could not afford the steamship fare from another country may contract with a wealthy u s landowner to perform a type of work for a fixed period in exchange for the price of the boat ticket approximately 300 000 european workers immigrated to the american colonies in the 1600s as indentured servants and indentured servitude continued throughout much of the 1700s indentured servitude in the u s began in the early 1600s in virginia not long after the settlement of jamestown many early american settlers sought cheap labor to help manage their large estates and farms and commonly agreed to fund the passage of european immigrants to virginia in exchange for their labor other parts of the world also engaged in indentured servitude at the same time that it was occurring in the united states many citizens left europe for the caribbean to work as indentured servants on sugar plantations contracts stipulated that the worker would repay the loan to the lender by performing a certain kind of labor for a set period skilled laborers were usually indentured for four or five years but unskilled workers often needed to remain for seven or more years the indentured servitude system allowed landowners to provide only food and shelter for indentured servants as opposed to wages some landowners offered their servants basic medical care but typically labor contracts did not provide for this some indentured servants served as cooks gardeners housekeepers field workers or general laborers while others learned specific trades such as blacksmithing plastering and bricklaying which they often parlayed into future careers most workers who became indentured servants were males generally in their late teens and early twenties but women also entered into these agreements and often worked as household employees or domestic servants although some indentured servants completed their contracts and received land livestock tools and other necessities many others did not live to pay off their contracts because they perished from diseases or work related accidents or fled before completing their terms of service indentured servants enjoyed little personal freedom and some contracts allowed landowners to extend the work period for servants who were accused of behavior that was deemed improper history of indentured servitudeindentured servitude was historically used to pay an apprentice who agreed to work for free for a master tradesman to learn a trade but evolved as a way for an individual to pay the cost of transportation to the american colonies workers were commonly bought and sold when they arrived at their destinations great britain used indentured servitude as a punishment for captured prisoners of war in rebellions and civil wars until the late 18th century indentured servitude was common in america and a common way for europeans to immigrate to the colonies the system was also used to exploit asian immigrants who were used mainly to construct roads and railway systems over one half of all european immigrants to the american colonies between the 1630s and the american revolution came under indentures many young children were taken from england to the american colonies as indentured servants often kidnapped off the streets and sent off as merchandise to be sold as servants in the new world 2both the american and british governments passed laws that helped the decline of indentured servitude the united kingdom s passenger vessels act of 1803 regulated travel conditions aboard ships to make transportation more expensive and an american law passed in 1833 abolished the imprisonment of debtors which made prosecuting runaway servants difficult the 13th amendment to the u s constitution prohibited most forms of involuntary labor except as punishment for a crime although it does not specifically refer to indentured servitude the supreme court has interpreted the amendment to include compulsory labor in repayment of debt 3however informal debt bondage continued in the form of sharecropping and black codes though officially free tenant farmers were unable to leave until they had repaid debts to the owners of the land where they worked since these debts tended to grow over time the sharecropping system effectively replaced chattel slavery with an informal system of debt bondage 4outside the united states indentured servitude was prevalent in the british colonies which relied on migrant labor to staff its sugar plantations after the abolition of slavery around 500 000 indentured laborers were transferred to the caribbean between 1837 and 1917 when the practice was officially abolished 56virginia and maryland operated under the headright system where incentives such as 50 acres of land were provided for planters to import workers this system was used by wealthy plantation aristocrats to increase their land holdings 7indentured servitude vs slaveryimmigrants often entered indentured servitude contracts of their own free will as opposed to slaves who did not both slaves and indentured servants could be sold loaned or inherited the treatment of indentured servants differed greatly from one master to another some masters considered their indentured servants as personal property and made these individuals work difficult jobs before their contracts expired others treated slaves more humanely than their indentured servants because slaves were regarded as a lifetime investment and servants would leave within a few years indentured servants did have limited rights including access to the courts and entitlement to own land however masters retained their right to prohibit their servants from marrying and had the authority to sell them to another master at any time indentured servitude todaya modern form of indentured servitude still exists in the form of debt bondage also known as bonded labor where people work for low or no wages in repayment of a debt this may be for a debt that the worker agreed to work off as a condition for receiving a loan or advance or a debt that was inherited although prohibited by u s law unethical employers may take advantage of a person s migrant status to compel work in repayment of a debt if such conditions violate labor laws or other rights this may be considered a form of human trafficking 8people in debt bondage may endure slavery like conditions like being forced to stay on the employer s premises denied access to the authorities or being subject to physical or psychological abuse there are no exact figures but the u n estimates that around 21 million people are subject to some form of forced labor debt bondage is the most prevalent type 9 | |
what were freedom dues for indentured servants | after serving their time as servants and paid with meals and housing indentured servants were given freedom dues which often included a piece of land and supplies | |
what were the jobs of indentured servants | indentured servants often served as field workers gardeners cooks and laborers | |
what is the meaning of indenture | an indenture is a contract and for indentured servants these contracts contained indented marks along the sides of the document when the document was finalized two copies were made one copy was placed over the other and the edges of the pages were defaced or marked with indented characters servants were often uneducated and could be cheated so marking the two original copies helped to ensure a lasting means of authenticating the contract the bottom lineindentured servitude is a labor contract where an individual will work to repay an indenture or loan over some time commonly several years indentured servitude was popular in american colonies as many worked in exchange for the price of passage to america following the civil war the 13th amendment made indentured servitude illegal in the united states | |
what is an independent contractor | an independent contractor is a self employed person or entity contracted to perform work for or provide services to another entity as a non employee independent contractors must pay their own social security and medicare taxes in addition an entity that uses the services of an independent contractor is not required to provide them with employment benefits such as health insurance and employer sponsored retirement accounts that the entity may otherwise provide to its employees 12 the payer must correctly classify each payee as either an independent contractor or an employee another term for an independent contractor is freelancer understanding the category of an independent contractoran independent contractor works with clients on a temporary or contracted basis rather than as a direct employee this job status has become increasingly prevalent in the rise of what has been dubbed the gig economy doctors dentists veterinarians lawyers and many other professionals who provide independent services are classified as independent contractors by the internal revenue service irs however the category also includes contractors subcontractors writers software designers auctioneers actors musicians and many others who provide independent services to the general public 3according to the irs an individual qualifies as an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done 3 | |
when you work as an independent contractor you have more control over when and how much you work and are essentially your own boss you are considered self employed and are responsible for paying your taxes | independent contractors must decide how much freedom they need versus how much risk they are willing to assume independent contractors must keep track of their earnings and include every payment received from clients clients are legally obliged to issue 1099 misc forms to their contractors if the amount they paid warrants that expense if an independent contractor earns more than 600 from a single payer that payer is required to issue the contractor a 1099 form detailing their earnings for the year 4 | |
how to pay taxes as an independent contractor | in the united states independent contractors are considered sole proprietors or single member limited liability companies llcs they must report all their income and expenses on schedule c of form 1040 or schedule e if they have profits or losses from rental properties further they must submit estimated taxes to the irs usually every quarter using form 1040 es 15however as sole proprietors independent contractors do not necessarily pay taxes on their gross earnings applicable business expenses can reduce their overall tax obligation the difference between gross earnings and business expenses is the net income on which taxes are due for the 2024 tax year independent contractors pay 12 4 in social security contributions on the first 168 600 of net income and 2 9 in medicare taxes on all net income 6 single filers must pay an additional 0 9 medicare tax on self employment income that exceeds 125 000 if they are married and filing separately 200 000 if they are married and filing jointly and 200 000 if another tax status applies to them 7some independent contractors may also need to pay state sales taxes for producing products but it can depend on the type of product being made independent contractors have access to alternative retirement plans such as a sep ira simple ira and solo 401 k however they must fund them all by themselves and they have no access to unemployment insurance or workers compensation payments 8910advantages and disadvantages of being an independent contractorthe pros of being an independent contractor generally relate to the greater freedom they enjoy they can set their hours pursue work they love and decide what work they will and will not accept those who can work from home may save money on transportation and the wardrobe needed to work in an office they may also get the home office tax deduction that allows them to deduct the business portion of their bills for such things as insurance rent repairs security systems and utilities and services 11independent contractors have complete control over building their business from hiring and firing to choosing clients unlike employees who have a set annual salary there s no limit on how much money they can earn finally they can enjoy a sense of pride and accomplishment in building a successful business enterprise that belongs to no one but them the cons of being an independent contractor are related to the risk of going bankrupt and the opportunity cost of a regular career they aren t supported by a regular salary when business is terrible and their income can be unpredictable and highly volatile this income fluctuation can cause stress and make it harder for independent contractors to qualify for mortgages car loans and other types of loans they are responsible for all business costs no reimbursable expense reports for them and if working alone they lack the support and camaraderie of coworkers independent contractors are not eligible for employer provided healthcare plans so they must completely fund their healthcare they must also pay both the employee and the employer parts of social security and medicare taxes what s known as the self employment tax 12 they are not eligible for employer sponsored 401 k plans or matching contributions from those who employ them can set their own hours and choose their own worknot limited by an annual salary as to how much money they can earncan save money by working from homeresponsible for all of their business expensesmust fund their own healthcare and retirementaren t eligible for unemployment insurance or workers compensationexample of an independent contractorone example of an independent contractor would be an interior designer who works for themselves and has a roster of clients who hire them to decorate their homes the interior designer might even work on a contract for an architectural firm that employs them to work closely with their clients throughout the building process of a new home the designer an independent contractor would do whatever job is set out in the agreement and bill the architectural firm with whom they are contracted to work either an hourly or flat rate for the work executed to get paid what is owed the designer must send its client the architectural firm invoices at the same time the interior designer might be working for other clients and working on various homes simultaneously the alternative would be working as an in house designer and only working for clients of the architectural firm that employs the designer | |
how do you become an independent contractor | you can become an independent contractor by working for yourself many freelancers in a gig centric economy transition to independent contractors who work on a contractual basis to provide goods or services independent contractors may have a registered legal business name earn any necessary certifications or licenses and pay their estimated taxes quarterly to the irs | |
what is the difference between an independent contractor and self employed | independent contractors are considered to be self employed which means working for yourself rather than exclusively for an employer being an independent contractor means providing labour or services on a contractual basis as a non employee an independent contractor is self employed however a self employed individual is not necessarily an independent contractor | |
how do you fill out a w9 as an independent contractor | if you are an independent contractor and hired by a company or person to perform a service chances are they will ask you to fill out a w 9 form you must verify information including name address and tax identification number all the pages of the w 9 are available on the irs website which also provides step by step directions on how to fill it out 13 | |
how do you fill out a 1099 misc form for an independent contractor | form 1099 misc is available on the irs website for anyone who needs it there are 18 boxes to fill out on the form plus you must include the payee s name address a tax identification number for both the payee and recipient plus the recipient s name and address 14 the irs provides step by step instructions on how to fill out the form 15 | |
how do you pay an independent contractor | you pay an independent contractor just like you would pay any freelancer that could be by the hour by the project or a flat fee you can pay an independent contractor by check venmo paypal or cash the bottom lineworking as an independent contractor can be a great way to earn a living for people who desire flexibility don t mind inconsistent earnings and who can manage their time while potentially juggling multiple clients in addition independent contractors must be comfortable with filing their taxes with the irs and paying for their own insurance plus retirement savings for some the freedom to choose projects and the flexibility of working for themselves make the challenges worth it | |
what is an index | a financial index produces a numeric score based on inputs such as a variety of asset prices it can be used to track the performance of a group of assets in a standardized way indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market these could be constructed as a broad based index that captures the entire market such as the standard poor s 500 index or dow jones industrial average djia or more specialized such as indexes that track a particular industry or segment such as the russell 2000 index which tracks only small cap stocks investopedia mira norianunderstanding indexesindexes are also created to measure other financial or economic data such as interest rates inflation or manufacturing output indexes often serve as benchmarks against which to evaluate the performance of a portfolio s returns one popular investment strategy known as indexing is to try to replicate such an index in a passive manner rather than trying to outperform it indexes in finance are typically used to track a statistical measure of change in various security prices in finance it typically refers to a statistical measure of change in a securities market in the case of financial markets stock and bond market indexes consist of a hypothetical portfolio of securities representing a particular market or a segment of it you cannot invest directly in an index the s p 500 index and the bloomberg us aggregate bond index are common benchmarks for the u s stock and bond markets respectively in reference to mortgages it refers to a benchmark interest rate created by a third party each index related to the stock and bond markets has its own calculation methodology in most cases the relative change of an index is more important than the actual numeric value representing the index for example if the ftse 100 index is at 6 670 40 that number tells investors the index is nearly seven times its base level of 1 000 however to assess how the index has changed from the previous day investors must look at the amount the index has fallen often expressed as a percentage index investingindexes are also often used as benchmarks against which to measure the performance of mutual funds and exchange traded funds etfs for instance many mutual funds compare their returns to the return in the s p 500 index to give investors a sense of how much more or less the managers are earning on their money than they would make in an index fund indexing is a form of passive fund management instead of a fund portfolio manager actively stock picking and market timing that is choosing securities to invest in and strategizing when to buy and sell them the fund manager builds a portfolio wherein the holdings mirror the securities of a particular index the idea is that by mimicking the profile of the index the stock market as a whole or a broad segment of it the fund will match its performance as well since you cannot invest directly in an index index funds are created to track their performance these funds incorporate securities that closely mimic those found in an index thereby allowing an investor to bet on its performance for a fee an example of a popular index fund is the vanguard s p 500 etf voo which closely mirrors the s p 500 index |
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