Corporate Tax Expense

[?] Subscribe To The Bookkeeping Blog

The Tea Break

The Bookkeeping

The Tax - Canada

The Tax - U.S.

The Search

The Back Office

Corporate Tax Expense

by Too Shy To Say

The Question(s):

Perhaps a silly question - but how do I enter the corporate tax expense?

Is it a business expense at all?

Which two accounts do I use to make the entry?

My Answer:

Do you know how many silly questions I've asked in my life? ... Well I just stopped counting ... sometimes my questions are smart ... and sometimes my questions are just plain stupid because my brain gets stuck ... it's like a huge boulder blocking my path ... do I climb over, go around it ... :0)

But does it stop me asking ... no uh uh!

I will keep this answer simple and give you the basic tax bookkeeping entry ... ignoring deferred taxes and the refund of dividends on hand.

Debit (increase) Income Tax Expense (an expense account on your income statement)

Credit (increase) Income Tax Payable (a current liability account on your balance sheet)

Thanks for the question ... and hope my answer helps you out. ;-)

Comments for
Corporate Tax Expense

Click here to add your own comments

Feb 10, 2010

Corporate Tax ...
by: Anonymous

Thank you- the entry makes perfect sense.

What still confuses me is the concept of how this income tax is a "business expense".

Is it because the expense is an adjustment to the books in the same year after taxes have been filed and thus doesn't appear on the actual income tax return submitted?

Is this entry the same for individuals and partnerships?

I really appreciate your help!

Feb 10, 2010

Year-end Adjusting Entry
by: Lake, Bookkeeping Essentials

The IRS website under Businesses>Business Expenses explains that "business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit."

You cannot operate a business in North America without paying income taxes ... it is money that leaves the business ... so it is a business expense.

I think what is confusing you is the timing of the transactions. You initially book your income tax entry as an adjusting entry when doing year-end.

If you remember, one of the basic principles in bookkeeping is to match revenues with expenses.

The adjusting entry is booked to the prior year, not the current year, so you can match the tax expense with the revenue for that period.

Once you actually pay your corporate taxes, you will adjust your initial estimate to the actual tax liability, which is paid in the current year.

The actual amount of taxes you pay when you file your tax return would show on the tax return line called "Taxes Payable". It is what you are actually calculating when you prepare the return.

Remember, one of the reasons this is so confusing is because the rules for financial reporting are often different than the rules used to determine your taxable income. There are permanent and temporary timing differences between the two.

Does that help ... or is it as clear as mud?

X Close Editor

Feb 10, 2010
Rating

Submitted by: Lake, Bookkeeping Essentials

Title

Comment
The IRS website under Businesses>Business Expenses explains that "business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit." You cannot operate a business in North America without paying income taxes ... it is money that leaves the business ... so it is a business expense. I think what is confusing you is the timing of the transactions. You initially book your income tax entry as an adjusting entry when doing year-end. If you remember, one of the basic principles in bookkeeping is to <a href="http://www.bookkeeping-essentials.com/management-skill.html#GAAP1">match revenues with expenses</a>. <b>The adjusting entry is booked to the prior year</b>, not the current year, so you can match the tax expense with the revenue for that period. Once you actually pay your corporate taxes, you will adjust your initial estimate to <b>the actual tax liability, which is paid in the current year</b>. The actual amount of taxes you pay when you file your tax return would show on the tax return line called "Taxes Payable". It is what you are actually calculating when you prepare the return. Remember, one of the reasons this is so confusing is because the rules for financial reporting are often different than the rules used to determine your taxable income. There are permanent and temporary timing differences between the two. Does that help ... or is it as clear as mud?

Cancel Delete Delete & Ban

throbber Updating Comments page...

Feb 11, 2010

Thank you!
by: Anonymous

I can't thank you enough for making this all clear to me! Thank you for providing such a great service.

Click here to add your own comments

footer for bookkeeping page

Corporate Tax Expense

Comments for Corporate Tax Expense

Comments for
Corporate Tax Expense