Tax expense
Encyclopedia
At its simplest, a company's tax expense, or tax charge, as it sometimes called, is computed in by multiplying the income before tax number, as reported to shareholders, by the appropriate tax rate. In reality, the computation is typically considerably more complex due to things such as expenses considered not deductible by taxing authorities ("add backs"), the range of tax rates applicable to various levels of income, different tax rates in different jurisdictions, multiple layers of tax on income, and other issues.
Historically, in many places, a revenue-expense method was used, in which the income statement was seen as primary, and the balance sheet as secondary. Under International Financial Reporting Standards
, as well as many other accounting principles, tax expense is the result of computing current and deferred tax payable using the asset-liability method in which the balance sheet is seen as primary and the income statement as secondary. The approach in United States Generally Accepted Accounting Principles was codified in SFAS 96 published in December 1987, and updated in February 1992 with SFAS 109, accounting for income taxes from a balance-sheet approach. See List of FASB Pronouncements.
Current tax payable is computed by multiplying the taxable income number, as reported to the tax authorities, by the appropriate tax rate. As with tax expense, the computation is made more complex by the range of tax rates that are applicable to various levels of income and the various deductions and adjustments that the tax authorities allow.
In the United States, the U.K. and elsewhere, companies are permitted to report one pre-tax income number (also called income before tax, profit before tax or earnings before income tax) to shareholders, and another, called taxable income, to the tax authorities. Differences between taxable income and the pre-tax income or profit number reported for financial statements are either temporary or permanent in nature. Permanent differences result when deductibility rules differ in perpetuity between accounting and tax law. Temporary differences result when the recognition of deductions for tax and accounting standards differ in their timing. The result is a gap between tax expense computed using income before tax and current tax payable computed using taxable income. This gap is known as deferred tax
. If the tax expense exceeds the current tax payable then there is a deferred tax payable; if the current tax payable exceeds the tax expense then there is a deferred tax receivable.
In the long run, income before tax and taxable income will likely be more similar than they are in any given period. If the one is less in earlier years, then it will be greater in later years. Deferred taxes will reverse themselves in the long run and in total will zero out, unless there is something like a change in tax rates in the intervening period. A deferred tax payable results from a tax break in the early years and will reverse itself in later years; a deferred tax receivable results from more taxes being paid in early years than the tax expense reported to shareholders and will again reverse itself in later years. The deferred tax amount is computed by estimating the amount and the timing of the reversal and multiplying that by the appropriate tax rates.
Historically, in many places, a revenue-expense method was used, in which the income statement was seen as primary, and the balance sheet as secondary. Under International Financial Reporting Standards
International Financial Reporting Standards
International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....
, as well as many other accounting principles, tax expense is the result of computing current and deferred tax payable using the asset-liability method in which the balance sheet is seen as primary and the income statement as secondary. The approach in United States Generally Accepted Accounting Principles was codified in SFAS 96 published in December 1987, and updated in February 1992 with SFAS 109, accounting for income taxes from a balance-sheet approach. See List of FASB Pronouncements.
Current tax payable is computed by multiplying the taxable income number, as reported to the tax authorities, by the appropriate tax rate. As with tax expense, the computation is made more complex by the range of tax rates that are applicable to various levels of income and the various deductions and adjustments that the tax authorities allow.
In the United States, the U.K. and elsewhere, companies are permitted to report one pre-tax income number (also called income before tax, profit before tax or earnings before income tax) to shareholders, and another, called taxable income, to the tax authorities. Differences between taxable income and the pre-tax income or profit number reported for financial statements are either temporary or permanent in nature. Permanent differences result when deductibility rules differ in perpetuity between accounting and tax law. Temporary differences result when the recognition of deductions for tax and accounting standards differ in their timing. The result is a gap between tax expense computed using income before tax and current tax payable computed using taxable income. This gap is known as deferred tax
Deferred tax
Deferred tax is an accounting concept , meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.- Temporary differences :Temporary differences are differences between...
. If the tax expense exceeds the current tax payable then there is a deferred tax payable; if the current tax payable exceeds the tax expense then there is a deferred tax receivable.
In the long run, income before tax and taxable income will likely be more similar than they are in any given period. If the one is less in earlier years, then it will be greater in later years. Deferred taxes will reverse themselves in the long run and in total will zero out, unless there is something like a change in tax rates in the intervening period. A deferred tax payable results from a tax break in the early years and will reverse itself in later years; a deferred tax receivable results from more taxes being paid in early years than the tax expense reported to shareholders and will again reverse itself in later years. The deferred tax amount is computed by estimating the amount and the timing of the reversal and multiplying that by the appropriate tax rates.