Is income tax an expense or liability?

Definition of Income Tax

In the accounting for a regular U.S. corporation, income tax usually refers to the federal, state, local, and foreign countries' taxes that are levied based on a corporation's taxable income. The taxable income and the related income tax are found on the corporation's income tax return. (The corporation's taxable income is based on the income tax laws and regulations of the various governments.)

The accounting and financial reporting of a regular corporation's income taxes is complicated because the accounting principles are likely to be different from the income tax laws and regulations. Generally, a profitable regular corporation's financial statements will report both income tax expense and a current liability such as income taxes payable.

Examples of Income Tax Expense and Income Taxes Payable

A profitable corporation's financial statements will report:

  • Income tax expense on its income statement for the revenues and expenses appearing on the accounting period's income statement, and
  • Income taxes payable (a current liability on the balance sheet) for the amount of income taxes owed to the various governments as of the date of the balance sheet

If a corporation has overpaid its income taxes and is entitled to a refund, the amount will be reported on the balance sheet as a current asset such as Other receivables.

If there are differences between the time when certain revenues and expenses are reported on the income tax returns versus when they are reported on the financial statements, the amount of the deferred income tax will likely be reported on the balance sheet as a noncurrent liability as Deferred income taxes.