Income Tax Expense

Intermediate

Income tax expense is the total tax charge a company records in its income statement for a period, including both tax payable now and changes in deferred tax.

Income tax expense is deducted from pretax income to arrive at net income. It is not always the same as the tax the company actually pays in cash that year.

It has two parts. Current tax is the tax payable on the period's taxable profit under tax law. Deferred tax reflects tax that will be payable or recoverable in future periods because of timing differences between accounting and tax rules.

For example, a company might owe current tax of 800,000 for the year and also record a deferred tax charge of 100,000, giving total income tax expense of 900,000.

Dividing income tax expense by pretax income gives the effective tax rate. If pretax income is 3.6 million and income tax expense is 900,000, the effective tax rate is 25%.

The notes to the financial statements usually explain the difference between the effective rate and the statutory rate, listing reasons such as tax credits, non-deductible expenses, profits earned in countries with different rates and changes in tax law. Analysts read this reconciliation to understand whether a company's tax rate is likely to persist.

For worked examples and full lessons, visit notesbysara.org.