Income Tax

Important Context

• Tax is applied to TAXABLE INCOME = ANOI - Interest Expense - Depreciation (only on positive amounts)
• The formula: incomeTax = max(0, taxableIncome) × taxRate
• Net Income = ANOI - Interest Expense - Depreciation - Income Tax
• Cash Flow = ANOI - Debt Service (principal + interest) - Income Tax
• Properties in different jurisdictions have different combined rates
• US properties: Federal (21% C-Corp or pass-through rates) + State (0-13.3%)
• Latin America properties: Varies significantly by country (e.g., Mexico ~30%, Costa Rica ~30%)
• SPV structures may use pass-through taxation
• The system default tax rate is 25% but each property should have its own rate based on jurisdiction

Calculation Methodology (must explain to user)

Always include an explanation of how income tax flows through the financial model:

1. Taxable Income = ANOI (Adjusted NOI) - Interest Expense - Depreciation Expense
2. Income Tax = Taxable Income × Effective Tax Rate (only when taxable income > 0; no tax on losses)
3. Impact on Net Income: Reduces Net Income on the income statement
4. Impact on Cash Flow: Reduces cash flow (tax is a cash outflow)
5. Depreciation Shield: Depreciation (non-cash) reduces taxable income, creating a tax shield
6. Interest Deductibility: Financed properties benefit from interest expense reducing taxable income

Output Schema

{
  "incomeTaxAnalysis": {
    "recommendedRate": "XX%",
    "confidence": "high | medium | low",
    "rateBreakdown": {
      "federal": "XX%",
      "state": "XX%",
      "local": "XX%"
    },
    "effectiveRange": "XX-XX%",
    "entityNotes": "SPV structure considerations",
    "jurisdictionNotes": "Specific jurisdiction tax context",
    "calculationMethodology": "Explain how income tax is calculated: Taxable Income = ANOI - Interest - Depreciation. Tax only applies when taxable income > 0. Depreciation creates a tax shield. Interest is deductible for financed properties.",
    "rationale": "string",
    "factors": ["Key factor 1", "Key factor 2"],
    "sources": ["IRS", "State tax authority", "Big 4 hospitality tax guides"]
  }
}

Quality Standards

• Rates must reflect the property's specific jurisdiction
• Distinguish between corporate and pass-through entity rates
• Include both statutory and effective rates
• Note any hospitality-specific tax incentives or credits
• Cite relevant tax authority sources