What is 'Income Tax Payable'
Income tax payable is a type of account in the current liabilities section of a company's balance sheet comprised of taxes that must be paid to the government within one year. Income tax payable is calculated according to the prevailing tax law in the company's home country. The taxes are calculated on the company's net income according to its corporate tax rate; if a company is due to receive a tax benefit from its revenue agency, the amount of income tax payable will decrease.
BREAKING DOWN 'Income Tax Payable'
Income tax payable is usually a current liability, because the debt is anticipated to be extinguished within the next year. However, any portion of income tax payable not attributable for payment within the next 12 months is considered a long-term liability.
Types of Income Taxes Payable
Income taxes payable encompass levies assessed at the federal, state and local levels. The dollar amount is the amount that has accrued since the company’s last income tax return. In general, payroll taxes, property taxes and sales taxes are listed as separate liabilities.
Income Tax Payable vs. Income Tax Expense
Income tax expense is calculated by a business based on generally accepted accounting principles (GAAP). This figure is listed on the income statement and is usually the last expense line item listed before net income is calculated. Upon completing a federal income tax return, a business knows the true amount of taxes owed, which is reflected as a tax liability. A difference arises between income tax expense and income tax liability because the two sets of rules – GAAP and the Internal Revenue Service tax code – do not treat all items the same.
An example of this difference arises when depreciating assets. GAAP allows for numerous different methods of depreciation that all typically result in different expense amounts by period. The tax code, however, has more stringent rules that limit acceptable depreciation methods. The use of these two depreciation methods for two different purposes create a difference in the tax expense and the tax liability.
Deferred Tax Liability
Income tax payable is one component necessary in calculating an organization's deferred tax liability. A deferred tax liability arises when a difference is reported between a company's income tax liability and income tax expense. This difference may arise due to the timing of when the actual income tax is due. For example, a business may owe $1,000 in income taxes when calculated using accounting standards. However, if it only owes $750 on its income tax return, the $250 difference is expected to be a liability in future periods. The difference arises because rule differences cause some liability to be deferred to a future period.