Accounting Dictionary

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Income Tax Payable

Definition: Income tax payable is a liability that an entity incurs that is based on its reported level of profitability, and which can be payable to a variety of governments, such as the federal and state governments within which the entity resides. Once the entity pays the income tax, the liability is eliminated. As an alternative to payment, the income tax liability can also be reduced through the application of tax credits granted by the applicable government entity.

The amount of income tax payable is not necessarily based solely on the accounting profit reported by a business. There may be a number of adjustments allowed by the government that alters the accounting profit to result in a taxable profit, against which the income tax rate is then applied. These adjustments can result in timing differences between the recognition of profits for accounting and tax reporting that can, in turn, create differences in the amount of income tax payable (as calculated on a tax return) and the income tax expense reported in a company's income statement.

This liability is usually classified as a current liability in the balance sheet, since it is normally payable to the applicable government(s) within one year.

For example, if ABC International has $100,000 of before-tax profits, and the federal government imposes a 35% income tax, then ABC should record a debit to the income tax expense account of $35,000 and a credit to the income tax payable account of $35,000. When ABC later pays the tax, it debits the income tax payable account for $35,000, and credits the cash account for $35,000.