Also known as a tax charge, a tax expense is a figure that results from multiplying a company’s income for a specific period by the applicable tax rate for that period. In many instances, the data reflected on the income statement takes precedence, while the data found on the company balance sheet is considered secondary. Tax expenses make use of the income before the application of the tax number, which is the figure that is normally reported to company shareholders. Depending on the tax laws that apply in the area where the company is based, this basic formula can be much more complicated. This is partially due to different tax rates that may apply to different types of income, as well as regulations that determine what does and does not constitute an allowable deduction.
The difficulty in calculating tax expenses may also be complicated if the tax laws that apply also call for the imposition of various forms of layered taxes that are relevant to a portion of the income generated, but not to the other sources of income. Differences in the way taxes are applied between local and national tax agencies further complicate the process. In nations where tax laws are subject to change with some frequency, the set of factors that must be taken into account when determining tax expenses will vary from one tax period to the next.
The use of the income tax number is important to the calculation of tax expenses. In nations like the United Kingdom and the United States, tax agencies allow companies to report what is known as one pre-tax income number, or earnings before income tax to their shareholders. This figure provides the shareholders with basic figures that show the total amount of income generated by the business within the specified period, regardless of the origin of that income. The figure is sometimes different from the actual taxable income, once allowances are made for any deductions that may be applicable to at least a portion of the revenue generated by the business.
When there is a gap between tax expenses and the current tax payable based on the actual taxable income, that difference is sometimes referred to as deferred tax. Categorizing that deferred tax within the accounting records of the business depends on which of the two figures is larger. When tax expenses are more than current tax payable, the deferred tax is recorded as deferred tax payable. In situations where the current tax payable is more than tax expenses, the figure is recorded as deferred tax receivable.