Income Tax Expense

• Income tax expense appears on the income statement and is a function of the amount a company earns after deducting all expenses from revenue. Calculated income tax expense is straightforward if you know the company's corporate tax rate. For example, if the corporate tax rate is 33 percent and the company earned $1.415 million, its income tax expense is $466.95 million ($1.415 million x 33 percent).
  
  

Income Tax Payable

• Income tax payable is a liability that occurs when the company has an outstanding tax bill. Income tax payable appears on the company's balance sheet as a current liability under short-term liabilities. However, because of federal tax laws, income tax payable may differ from income tax expense.
  
  

Tax Liability

• If the company defines net income under GAAP the same way it does when it reports income to the Internal Revenue Service, then income tax expense and income tax payable are the same. However, this is rarely the case. When a company elects to define net income differently for tax purposes, it does so for the sake of lowering its tax bill. Therefore, a company's actual tax liability may differ from the income tax payable amount. For example, a company may use straight-line depreciation under GAAP reporting but use an accelerated depreciation method such as the double declining balance method to reduce its taxable income.
  
  

Deferred Income Taxes

• Deferred taxes represent a liability for taxes a company owes, which it postpones to pay in future periods. The difference in recognizing expenses faster for tax reporting purposes than for GAAP creates a liability on the company's balance sheet. The rules for deferred taxes may be quite complex because, theoretically, a company may defer its income tax liability indefinitely if the company continues to purchase new equipment or depreciable assets. The differences between accounting income and taxable income create timing differences -- or the recognition of revenue or expense items in one year for tax purposes but in a different year for accounting purposes.
  
  

Accounting Entry

• The standard entry for recording income taxes is to debit income tax expense and credit income tax payable. For example, if the income tax expense is $3 million, the company debits $3 million to income tax expense (income statement) and credits $3 million to income tax payable (balance sheet). However, because of timing differences, the income tax expense is on GAAP income for financial reporting but the credit to income tax payable is what is actually paid. Therefore, the difference between the debit and credit entry creates a deferred tax liability or a deferred tax asset depending on the circumstance.