Tax Provision

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A tax provision is the total income tax expense a company records for a period in its income statement, made up of current tax owed for the period and deferred tax arising from timing differences.

The tax provision brings together two parts. Current tax is the amount the company expects to owe to tax authorities on this period's taxable profit. Deferred tax reflects changes in deferred tax assets and liabilities, recognising tax effects that will reverse in future.

For example, a company with accounting profit before tax of 1,000,000 and a 25% tax rate might report a tax provision of about 250,000. This might consist of 200,000 of current tax payable and 50,000 of deferred tax, because some income is recognised in the accounts before it is taxed.

Calculating the tax provision is complex for large groups operating in many countries. It requires estimating taxable profits under each country's rules, assessing uncertain tax positions and judging whether deferred tax assets can be used.

In everyday business language, tax provision can also mean an amount set aside to cover an expected tax bill. In the United States, the work of calculating it is often called the income tax provision, under the accounting rules known as ASC 740.

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