Income tax expense definition
/What is Income Tax Expense?
Income tax expense is the amount of expense that a business recognizes in an accounting period for the government tax related to its taxable profit. The amount of income tax expense recognized is unlikely to exactly match the standard income tax percentage that is applied to business income, since there are a number of differences between the reportable amount of income under the GAAP or IFRS frameworks and the reportable amount of income allowed under the applicable government tax code. For example, many companies use straight-line depreciation to calculate the depreciation reported in their financial statements, but employ accelerated depreciation to derive their taxable profit; the result is a taxable income figure that is lower than the reported income figure. Some corporations put so much effort into delaying or avoiding taxes that their income tax expense is nearly zero, despite reporting large profits.
Income tax expense can include the current tax expense and a deferred tax expense or benefit. The current tax expense is the amount that a business expects to pay in its current fiscal year, based on its reported taxable income and the tax rates in effect at that time. The deferred tax expense or benefit is caused by differences in the recognition of income in a firm’s income statement and in its tax return. These differences may be due to the timing of revenue and expense recognition, or because some of these items are recognized differently for reporting purposes versus tax purposes.
The calculation of income tax expense can be so complicated that this task is outsourced to a tax expert. If so, a company usually records an approximate tax expense on a monthly basis that is based on a historical percentage, which is adjusted on a quarterly or longer basis by the tax expert.
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Presentation of Income Tax Expense
The income tax expense is reported as a line item in the corporate income statement, while any liability for unpaid income taxes is reported in the income tax payable line item on the balance sheet. The amount of income tax expense recorded represents a direction reduction of the net income reported for that period.