What is Income Tax Payable?
Income tax payable represents a liability for financial accounting purposes. It shows the amount an organization expects to pay in income taxes within 12 months. This liability is reported in the current liabilities section of a company’s balance sheet.
Income tax payable is calculated using generally accepted accounting principles (GAAP) and current tax rates applicable in various jurisdictions where the organization operates. This includes federal, state, and local taxes in the United States, as well as taxes in other countries where the business derives income.
Key Insights
- Income Tax Payable: Represents current tax liabilities reported on a company’s balance sheet.
- Calculation Differences: Rules for computing tax owed and those for reporting taxes on financial statements can vary.
- Reporting: Income tax payable reflects taxes due within 12 months, while future taxes are shown as deferred income tax liabilities.
- Scope of Taxes: Includes federal, state, local, and foreign taxes.
Deep Dive into Income Tax Payable
Typically, the taxes owed by an organization are listed under the “income tax payable” line item on the company’s balance sheet. This reflects a current liability to the extent that the amount is due within 12 months.
GAAP establishes guidelines for reporting an event that generates income or an accrual of tax liability. These may differ from tax-law requirements for reporting the same event on tax returns. Common causes of discrepancies include different rules for depreciation and amortization. These timing differences are apparent in an organization’s financial statements. For instance, tax liabilities that accumulate during a year but are payable in future years are listed under deferred income tax liabilities.
Example Calculation
Consider a scenario where an event in 2023 results in $300 of income, taxed at the 2023 federal corporate tax rate of 21%. This leads to a tax liability of $63:
$300 x 0.21 = $63
GAAP necessitates recognizing the entire $300 income and the $63 tax liability in the income statement for the year the event occurs, i.e., 2023.
Deferring Tax Liability
Tax liability under GAAP may differ from how it is recognized for tax purposes, potentially stretching income or liability recognition over several years. For our initial example, if $300 is spread over three years for tax purposes, the 2023 balance sheet would show the IRS-facing liability as a current liability (income tax payable) of $21:
$300 x 0.21 = $63 / 3 = $21
This $21 is reported in the current liabilities section. The remaining $42, for future tax obligations, is marked as a deferred tax liability.
Comparing Income Tax Payable with Income Tax Expense
Balance sheets report the actual amount of taxes due to the IRS, marked as either current tax liabilities (income tax payable) or deferred income tax liabilities. Contrarily, income tax expense is shown on the organization’s income statement, typically as the last expense item deducted from pre-tax profit to determine net income.
For example, a US corporate taxpayer calculates income tax expense by applying the current corporate tax rate (21% in 2023) to the pre-tax profit mentioned on the income statement. This doesnt include other taxes like payroll, property, and sales taxes, which maybe itemized separately on financial statements or combined into a total tax expense tally.
Upon filing its federal income tax return, an organization determines the exact taxes due for that tax year. These are reflected as current income tax liabilities if payable within the year, while future liabilities are marked as deferred income tax liabilities on the balance sheet.
Key Definitions
- Income Tax Payable: The financial accounting term indicating the current liability for taxes expected to be paid within 12 months, shown on the balance sheet.
- Income Tax Expense: Reflects the total taxes owed on pre-tax profit and appears on the income statement.
- Deferred Tax Liabilities: Taxes due in future periods, not immediately payable within the current year.
Conclusion
Income tax payable is a specific liability reported on a company’s financial statements, indicating the amount expected to be paid in income taxes within 12 months. The differences between financial accounting rules for reporting tax liabilities and the IRS tax code create discrepancies between tax expenses reported on financial statements and actual tax liabilities. Understanding these nuances is vital for accurate financial reporting and compliance.
Related Terms: Deferred Income Tax Liabilities, Income Tax Expense, Balance Sheet, Payroll Taxes, Sales Taxes.
References
- Accounting Tools. “Income Tax Payable Definition”.
- Financial Accounting Standards Board. “Summary of Statement No. 96: Accounting for Income Taxes”.
- Internal Revenue Service. “Publication 542, Corporations”, Page 15.
- Accounting Tools. “Income Tax Expense Definition”.
