Income-statement amount combining current and deferred income-tax effects attributable to the reporting period.
Tax expense is the income-statement amount for current and deferred income taxes attributable to the reporting period. It is not necessarily the tax return balance, cash tax paid, or tax payable at period-end. In consolidated financial statements, it can reflect multiple entities, jurisdictions, rates, temporary differences, losses, credits, and uncertain positions.
For a simple income-statement presentation:
A deferred tax benefit is negative in this relationship. The formula is a summary, not a substitute for tracing tax effects to profit or loss, OCI, equity, acquisition accounting, or another required location.
| Component | What it reflects | Common evidence |
|---|---|---|
| Current tax expense | Tax on current or prior-period taxable profit, adjusted under tax law | Tax computation, return, assessments, credits, installments |
| Deferred tax expense or benefit | Change in future tax effects recognized in profit or loss | Temporary-difference schedule, rates, loss and credit carryforwards |
| Tax payable or receivable | Current tax still owed or recoverable | Payments, filings, notices, settlement records |
| Cash taxes paid | Cash transferred to tax authorities during the period | Bank records and cash-flow disclosures |
Assume a company has $1,000,000 accounting profit before tax. It also has:
Taxable income for this simplified example is:
Current tax expense is:
The $100,000 temporary difference creates a $25,000 deferred tax liability and deferred tax expense, assuming recognition is required and the same rate applies:
Total tax expense is:
The simplified entries are:
1Dr Current Tax Expense $237,500
2 Cr Current Tax Payable $237,500
3
4Dr Deferred Tax Expense $25,000
5 Cr Deferred Tax Liability $25,000
If the company paid $200,000 of current-tax installments, the remaining current tax payable would be $37,500, ignoring other balances and offsets. Cash paid is therefore different from both the $237,500 current tax expense and the $262,500 total tax expense.
The accounting effective tax rate is commonly calculated as:
For the example:
The rate exceeds 25% because the permanently nondeductible $50,000 expense adds $12,500 of tax without reducing accounting pretax profit. The temporary depreciation difference changes current versus deferred tax but does not change total tax expense in this simplified same-rate example.
| Difference | Effect on current taxable income | Deferred tax? | Typical effective-rate effect |
|---|---|---|---|
| Permanent nondeductible expense | Increases taxable income relative to accounting profit | No | Can raise effective rate |
| Permanently exempt income | Decreases taxable income relative to accounting profit | No | Can lower effective rate |
| Faster tax depreciation | Decreases current taxable income | Usually deferred tax liability | Often timing rather than permanent rate effect |
| Provision deductible when paid | Current deduction delayed | Potential deferred tax asset | Often timing, subject to realizability |
| Tax credit | Reduces current tax under applicable law | Depends on credit and carryforward facts | Can lower effective rate |
Temporary differences reverse in future periods. Permanent differences do not. Both can affect current tax, but only temporary differences and qualifying carryforwards create deferred tax balances.
| Amount | Why it differs from tax expense |
|---|---|
| Taxable income | Determined by tax law rather than financial-reporting recognition |
| Current tax payable | Reduced by installments, credits, refunds, and settlements |
| Cash taxes paid | Depends on payment dates and jurisdictions |
| Deferred tax balance | Cumulative future tax effect at the reporting date, including items outside profit or loss |
| Statutory tax rate | Legal rate before permanent differences, rate mixes, credits, and other reconciling items |
An analyst should not calculate deferred tax expense mechanically as the entire change in deferred tax liabilities minus deferred tax assets. Changes may arise through OCI, equity, acquisitions, foreign-currency translation, disposals, or balance-sheet netting.
The tax-rate reconciliation explains why reported tax expense differs from pretax profit multiplied by an applicable statutory rate. Common reconciling categories include:
Large changes deserve transaction-specific review. A low rate can result from durable jurisdictional mix or credits, but it can also reflect a one-time benefit. A high rate can arise from losses, nondeductible charges, or valuation-allowance changes rather than simply higher statutory rates.
Tax expense can materially affect net profit without producing an equal current cash outflow. Conversely, cash tax settlements can be large in a period with modest current tax expense.
Income-tax accounting depends on the entity, jurisdiction, tax law, and reporting framework. This page is educational and does not provide accounting, tax, legal, audit, valuation, or investment advice.