What is income tax expense?

Definition

Income tax expense is the tax charge that belongs to this period's profit. On the books, this is an Income Statement cost, not the cash that will leave when the return is paid.

A small C-corp bakery books the year-end estimate here. Paying the Treasury later does not move the charge into a different year.

Accrual books record the tax on this period's leftover, even if the payment is still open. Cash-basis books may wait until the payment leaves the bank.

This cost is the period's entity-level tax. It is not sales tax payable, and it is not the keep-the-shop-open costs that sit above operating income.

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

When you look at your Income Statement, this cost sits near the bottom after interest. Bread and pastry revenue and the costs of running the shop sit far above it.

When the figure is high, the bakery's leftover before tax was larger or the rate applied was higher. When it is low, a smaller leftover or a credit brought the charge down.

The Balance Sheet does not keep this period's cost after the close. The unpaid estimate sits in accrued liabilities until the payment goes out.

On the Statement of Cash Flows, the payment is the cash event. Cash from operating activities falls when the tax leaves the bank.

Operating expenses are the keep-the-doors-open costs of the bakery. Those stay above operating income; this tax charge sits after interest, near the last leftover.

Payroll tax liability is the withholdings and employer taxes on wages. That is a different tax and does not belong on this line.

How it works

The C-corp bakery earns a leftover after sales, shop costs, and interest. Entity-level tax is then estimated on that leftover.

At year end the books debit this cost and credit accrued liabilities. The Income Statement takes the charge now; the unpaid amount waits on the Balance Sheet.

When the bakery later pays the Treasury, the books debit accrued liabilities and credit cash. That payment clears the unpaid tax; it does not create a second cost.

Stay with this period's tax on profit when you read the line. Sales tax collected on a cake order is money held for the state, not this charge.

Do not treat a quarterly estimate check as the only reading of this line. Accrual books still record the full year that belongs here, then reduce the unpaid balance when each check goes out.

A profitable year raises this charge. A year with little leftover before tax keeps it small.

After the year closes, this cost is part of that year's leftover. Next year starts the count again from zero.

Example

Hearth & Crumb Bakery is a small C-corp. Year-end tax on this year's leftover 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

This cost hits the Income Statement, and accrued liabilities rise by $3,000. Cash has not moved.

Pastry revenue this year is $420,000. Operating income is unchanged by the $3,000; the leftover after interest and this tax is $3,000 lower.

When Hearth & Crumb pays the Treasury in the next quarter, cash falls and the accrued balance falls. The $3,000 cost stays in this year, where the profit sat.

If a later return shows the true tax was $2,700, the extra $300 is a correction. It is not a new batch of bread.

Common mix-ups

Income tax expense is not the same as the check to the Treasury. The cost is the period's tax on profit; the check is the cash that 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 line is tax on the bakery's own leftover.

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.