A future income tax is a portion of the tax debt that is deferred or delayed from collection until some point in the future. This type of deferral may arise owing to differences between the way that a business calculates taxes on its revenue and the methods used by a tax agency to calculate the amount of taxes due for a given period. The difference between the results of using these different methods results in taxes that may not be paid in the current period, but are assessed and considered due in a future period.
One of the factors that may lead to some sort of future income tax arrangement is when the deductions that are calculated on the net income of a business during a given tax year are significantly less than the deductions calculated on the taxable income for the same period. This sort of situation can prevail when the company experiences some sort of net loss during one year, and needs to spread that loss out over more than one tax period. This means that the company may pay taxes based on the taxable income and only claim part of the loss in one year, then claim the remainder of the loss the following year, when there are net gains. This makes it possible to offset some of those net gains the following year and thus reduce the amount of taxes that are due.
Future income tax may also be positive instead of negative. This situation can take place when the taxable income is lower than the net income, creating a difference in the calculations used by the company and a revenue agency to compute the tax due. As a result, there is the chance that the company may owe additional taxes on that same income, with that debt deferred until the following tax period. When this is the case, the difference identified as the future income tax must be tracked and accounted for in the company’s financial records, helping to ensure that the taxes are paid within the terms extended by the revenue agency.
The presence of future income tax does not necessarily mean that the methods of bookkeeping or of calculating taxes were in error in some manner. Depending on what is occurring in terms of taxable income versus net income, the situation may actually be to the benefit of the business. This is especially true when losses in one year can be carried over to offset gains the following year, effectively helping to lower the amount of taxes that the business must pay on the revenue that is generated.