Income Tax Payable Definition

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Income Tax Payable Definition

What Is Income Tax Payable?

“Income tax due” is a financial accounting obligation that reflects the amount that a company anticipates to pay in income taxes during the next 12 months. It is shown on a company’s balance statement in the current liabilities column.

Income tax due is calculated in line with generally accepted accounting principles (GAAP), taking into account the tax rates under the legislation of the countries where the company is taxed. Taxpayers in the United States are subject to federal, state, and municipal tax laws, as well as the tax rules of any other nations in which they operate and generate money.

Key Takeaways

  • The criteria for calculating the amount of taxes payable to government tax authorities for a year vary from the regulations for reporting taxes on financial statements.
  • Taxes represented on financial statements for US corporations include federal, state, and municipal taxes, as well as taxes levied by other countries where the companies operate and earn profits.
  • A current tax obligation reflected on a company’s balance sheet is referred to as income tax due in financial accounting.
  • The income tax payable balance-sheet amount equals the amount of taxes owing to be paid to government tax authorities within 12 months.
  • Deferred income tax obligations are reflected on the balance sheet for taxes that will be paid in a future year.

Understanding Income Tax Payable

In general, the taxes owing under relevant tax rules for the majority of events recorded in the financial statements for a year are included in the amount shown on an organization’s balance sheet as income tax payable. Income tax is indicated as a current obligation to the degree that it will be settled, i.e., paid, within the next 12 months. Deferred income tax obligations are tax liabilities that have accumulated in a year but whose payment is required in a later year.

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Some GAAP standards governing financial accounting for an event generating revenue or loss vary from tax-law requirements for reporting the same event on tax returns. The various depreciation and amortization rules in the two systems are frequent reasons of timing mismatches. These reporting variations between the two systems, notably in terms of the timing of tax obligations, are reflected in an organization’s financial statements.

For example, using the 2022 corporate federal income tax rate of 21%, the total US tax burden for a $300 event in 2022 is $63. GAAP normally requires that 100% of the $300 in event revenue, as well as the entire corporation tax obligation of $63, be reported in the organization’s income statement for the year in which the event happened, i.e. 2022.

The tax code, on the other hand, allows for the spread of income or tax obligation over, say, three years. This discrepancy in time will be shown in the financial accounts. For example, if $300 of GAAP income in 2022 is spread over three years for tax reasons, the taxes owed to the IRS in 2022 will be treated as a current obligation, i.e., a current income tax payment of $21. The balance owed to the IRS in the future will be shown as a $42 deferred tax obligation. A deferred tax obligation emerges when there is a discrepancy between an organization’s current income tax liability on its balance sheet and its income tax cost on its income statement.

Income Tax Payable vs. Income Tax Expense

Balance sheets show the actual amount of taxes owing to the IRS, which is classified as either current tax liabilities (income tax payable) or deferred income tax liabilities (noncurrent, longer-term liabilities). Income tax cost, on the other hand, is disclosed on an organization’s income statements. This sum is normally included as the final expenditure item and is deducted from pre-tax earnings when calculating net income or profit. GAAP assesses the amount of income tax expenditure for financial reporting purposes for a US business taxpayer by applying the current corporation tax rate, 21% in 2022, to the amount declared as profit before income taxes on the income statement.

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Other than income taxes, such as payroll taxes, property taxes, and sales taxes, may be indicated as distinct tax categories on financial statements. Alternatively, they may be accounted for in a complete tally of tax cost on an income statement and tax liabilities on a balance sheet.

An company knows the exact amount of taxes owing to the US government for the tax year after submitting its federal income tax return. The taxes actually owing for the year are recorded on the balance sheet as liabilities as current income tax obligations. Deferred income tax obligations are taxes owed in future years. If the firm owes state, municipal, or international income taxes, those liabilities will be included on its balance sheet as well.

What Does the Term Income Tax Payable Mean?

The phrase “income tax payable” refers to the current obligation disclosed on a company’s balance statement. It represents the taxes that the company anticipates to pay during the next 12 months.

What Does Income Tax Expense Represent?

The financial accounting phrase for the taxes that a firm pays on its pre-tax earnings is “income tax expense.” The sum is calculated in line with GAAP by adding the appropriate tax rate to the organization’s pre-tax earnings. It shows on a company’s income statement.

Why Do Taxes Owed to the IRS and Tax Amounts on Financial Statements Differ?

The criteria for calculating these sums and their uses vary. The tax rules that apply to a taxpayer’s income govern the amount of taxes that must be paid to the IRS (or the relevant state, municipal, or international tax agency). These real tax obligations are calculated on a yearly basis.

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GAAP is used to calculate the tax amounts shown on financial statements. They are a cost on an income statement in the computation of profit or loss for a certain period. Tax amounts on balance sheets represent liabilities that influence the organization’s worth. Taxes due during the next 12 months are classified as current liabilities and are denoted as income tax payable; taxes due in subsequent periods are classified as deferred tax liabilities.

The Bottom Line

Financial accounting regulations for reporting tax obligations and tax law requirements for calculating the amount of taxes actually payable to the IRS for the same occurrence might vary. In determining the tax amounts shown on financial statements and the tax obligations stated on tax returns, GAAP accounting rules and the US tax legislation do not handle all items in the same manner. As a result, the amount of taxes owing on an organization’s tax return may differ from the amount of tax cost on its income statement. Furthermore, discrepancies in the accounting principles and reasons for computing tax cost and tax liabilities on income statements and balance sheets might result in disparities in such amounts on income statements and balance sheets.

“Income tax due” refers particularly to a financial statement number: a liability disclosed in the current liabilities section of a company’s balance sheet that represents the amount that an organization intends to pay in income taxes within the next 12 months.

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