What is income tax expense?
Income tax expense is the tax charge assigned to a period's profit. It is recorded when the profit is earned, even if payment comes later.
Definition
Income tax expense is the tax charge assigned to a period's profit. On the books, it is an Income Statement cost, not the cash that will leave when the return is paid.
Accrual books record the tax that belongs to the period, even when payment comes later. Cash-basis books may record it when the payment leaves the bank.
This cost is the period's entity-level tax on profit. It is not sales tax payable, and it is not the operating cost of keeping the business open.
Where it shows up
P&L: Located near the bottom, after interest.
Balance Sheet: Related to the tax still unpaid.
Cash flow: Decreases when the tax is paid, reported cash from operating activities decreases.
See also: Net Income · Income Statement · Accrued Liabilities
On the Income Statement, this cost sits near the bottom after interest. When it is high, profit before tax or the applicable rate was higher; when it is low, the period had less taxable profit or a credit reduced the charge.
The Balance Sheet carries the unpaid estimate in accrued liabilities until payment. On the Statement of Cash Flows, the payment is the cash event and operating cash falls when the tax leaves the bank.
How it works
The books estimate the tax on the period's profit, record the cost, and later settle the unpaid amount.
A simple flow is:
- Estimate the tax that belongs to the period.
- Debit income tax expense and credit an accrued liability.
- Debit the liability and credit cash when payment is made.
The payment clears the liability; it does not create a second cost. Sales tax collected from customers is money held for the state, not tax on the business's own profit.
Example
Hearth & Crumb Bakery is a small C-corp. Year-end tax on this year's profit is estimated at $3,000, and the payment is still unpaid.
The bakery records:
Debit: Income tax expense $3,000
Credit: Accrued liabilities $3,000
The cost hits the Income Statement, accrued liabilities rise by $3,000, and cash has not moved. When the bakery pays later, the liability and cash fall while the $3,000 cost remains in the year it belongs to.
Common mix-ups
Income tax expense is not the same as the check to the Treasury. The expense belongs to the period's profit; the check later settles it.
Income tax expense is not the same as sales tax. Sales tax is collected from customers and owed to the state; this is tax on the entity's profit.
Income tax expense is not the same as payroll taxes. Payroll taxes attach to wages; this line attaches to the entity's profit.
Related terms
- Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
- Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.
- Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
- Operating Income: Profit from core operations before interest and taxes.
- EBITDA: Earnings before interest, taxes, depreciation, and amortization.
- Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
- Accrual Basis Accounting: Recording revenue when earned and expenses when incurred.
- Year-End Close: The heavier close at fiscal year end, including closing entries and audit preparation.