Income tax payable is an accounting term that signifies the amount a business anticipates paying in income taxes. This amount shows up as a liability on a company’s balance sheet, because it’s an expense the business expects to owe.
Understanding income tax payable can help businesses prepare their finances for expected taxes, rather than being caught off guard by the amounts of income tax bills.
Definition and Examples of Income Tax Payable
Income tax payable equals the amount that a company expects to owe in income taxes. Even though this expense is not necessarily clear-cut, as it can be hard to fully anticipate taxes owed, it gets accounted for as a liability on a company’s balance sheet because the company expects to pay out this amount.
- Alternate name: income tax provision
For example, if a company expects to have $100,000 in taxable income and anticipates paying taxes at a 21% rate (the current flat corporate tax rate in the U.S.), it might record an income tax payable expense of $21,000 on its balance sheet. However, the calculations usually aren’t this straightforward.
One issue is that taxable income isn’t always the same as book income, or a company’s financial income before taxes—the latter of which companies might report to investors or other stakeholders. That’s because accounting methods may differ from Internal Revenue Service (IRS) rules. For example, a company might decide to recognize revenue from a project over several years but owe taxes at the time the payment for it was actually received.
One element of complexity is that companies can have both current income tax expenses and deferred income tax expenses. Both get recognized as liabilities on a balance sheet, but deferred taxes are expected to be due in the future, so there can be more uncertainty for this expense in terms of income tax payable.
How Income Tax Payable Works
Income tax payable works by determining a company’s taxable income, then applying the expected tax rate to that amount. The result is the income tax payable.
However, figuring out taxable income isn’t always so simple. To get to this point, companies can start with their net income amounts before tax as determined using Generally Accepted Accounting Principles (GAAP) rules.
From there, they can apply permanent and temporary differences between net income and taxable income. That’s because, as mentioned, some accounting rules differ from tax rules, so you may need to adjust accordingly. For example, you may have subtracted expenses such as fines from your net income, which you might not be able to deduct for tax purposes.
In addition to permanent accounting differences, you may have temporary differences that show up in a different tax year, such as if you account for depreciation differently for your book income and your tax income.
Following these steps gives you your baseline taxable income, and after making any relevant tax adjustments such as applying tax credits, you can apply your corporate tax rate to your taxable income to figure out income tax payable. That amount gets accounted for as a liability on your balance sheet.
While this is more clear when calculating current-year taxable income and income tax payable, keep in mind that calculating deferred income tax payable can be a bit more complicated, as it might be hard to account for the deferred effects of things such as future-year tax credits, income, expenses, and net operating losses.
Types of Income Tax Payable
Companies can account for two main types of income tax payable:
- Current income tax payable: This equals the expected amount owed for the current tax year.
- Deferred income tax payable: This is the amount of tax expected to be owed in the future based on current circumstances, such as if a company recognizes book revenue for the current tax year that will incur taxes the following year.
In addition to these different types of income tax payable, there could be different types of income tax to account for, such as federal and state taxes. If a company operates in multiple jurisdictions, that could mean accounting for several local income tax rates.
- Income tax payable equals the amount a company expects to owe in income taxes.
- Income tax payable counts as a liability on a corporate balance sheet.
- A company can have both current and future (deferred) income tax payable.