As a business owner or a finance professional, you may have come across the term ‘income tax expense’ on the income statement of your company’s financial statements.
Income tax expense is a crucial component of the income statement that reflects the amount of taxes that a business owes to the government for the current financial year.
In this article, we will delve into the details of income tax expense and its implications for your business.
What is Income Tax Expense?
Income tax expense is the amount of tax that a business owes to the government for the current financial year. It is calculated by applying the applicable tax rate to the taxable income of the business.
The taxable income of the business is the difference between its revenues and deductible expenses.
Income tax expense is recognized as an expense in the income statement of the business and reduces the net income of the business.
Components of Income Tax Expense
Income tax expense comprises two components – current income tax expense and deferred income tax expense.
Current Income Tax Expense
Current income tax expense is the amount of tax that a business owes to the government for the current financial year. It is calculated by applying the applicable tax rate to the taxable income of the business.
Current income tax expense is recognized as an expense in the income statement of the business and reduces the net income of the business.
Deferred Income Tax Expense
Deferred income tax expense arises due to temporary differences between the book value and tax value of certain assets and liabilities of the business.
For instance, the depreciation of assets for tax purposes may be different from the depreciation for book purposes.
Deferred income tax expense is recognized as an expense in the income statement of the business and reduces the net income of the business.
Income Tax Expense on Income Statement
Income tax expense has several implications for your business, some of which are as follows:
1.Impact on Net Income
Income tax expense reduces the net income of the business. The higher the income tax expense, the lower will be the net income of the business. This can impact the profitability of the business and its ability to pay dividends to its shareholders.
2.Compliance Requirements
Businesses are required to comply with the tax laws of the country in which they operate. Failure to comply with tax laws can lead to penalties and fines. Income tax expense reflects the amount of tax that a business owes to the government and is an indicator of its compliance with tax laws.
3.Planning and Budgeting
Income tax expense can help businesses in planning and budgeting for their future tax liabilities. By analyzing their current and deferred income tax expenses, businesses can estimate their future tax liabilities and plan their finances accordingly.
Conclusion
Income tax expense is an important component of the income statement that reflects the amount of tax that a business owes to the government for the current financial year.
It comprises current income tax expense and deferred income tax expense. Income tax expense has several implications for your business, including its impact on net income, compliance requirements, and planning and budgeting.
As a business owner or a finance professional, it is crucial to understand income tax expense and its implications for your business.