Income taxes payable is a liability account that shows the amount of income tax a business owes to federal, state, local or foreign tax authorities for the current period, or earlier periods, but has not yet paid at the balance sheet date. Because it is normally due within a year, it is classified among current liabilities on the balance sheet. In some financial statements it appears under titles such as "income taxes currently payable," "accrued income taxes" or simply "taxes payable."
The account represents only the current portion of a company's tax obligation, based on taxable income under tax law. It is different from a deferred tax liability, which reflects tax that will become payable in future years because of temporary differences between accounting and tax rules. Together, the change in income taxes payable and the change in deferred taxes explain the total income tax expense reported on the income statement.
How the balance arises
A company calculates its taxable income for the year, applies the relevant tax rates and subtracts any credits to determine its current tax for the year. It then compares that amount with the estimated tax payments it has already made. The difference is the balance owed, recorded as income taxes payable, or, if payments exceeded the tax due, a receivable or prepaid tax asset.
US corporations generally must make quarterly estimated tax payments, due on the 15th day of the fourth, sixth, ninth and twelfth months of their tax year, and pay any remaining balance by the original due date of the return. For a calendar-year corporation filing Form 1120, that date is 15 April. An extension to file, requested on Form 7004, extends the time to file the return but not the time to pay the tax, so interest and penalties can apply to unpaid amounts.
Journal entries and worked example
A calendar-year company estimates its current federal and state income tax for the year at $840,000. During the year it makes four quarterly estimated payments of $180,000, a total of $720,000, debiting income taxes payable (or prepaid income taxes) and crediting cash each time. At 31 December, it records its current tax for the year:
- A debit to current income tax expense for $840,000.
- A credit to income taxes payable for $840,000.
After netting the $720,000 already paid, the year-end balance of income taxes payable is $120,000. When the company files its return and pays in April, it debits income taxes payable for $120,000 and credits cash. If the final return shows tax of $852,000 instead, the extra $12,000 is recorded as additional tax expense in the year it is identified, unless it reflects an error that must be corrected in earlier statements. If the company also has temporary differences, it separately records deferred tax expense or benefit through a deferred tax liability or deferred tax asset.
Presentation, disclosure and analysis
Under ASC 740 in US GAAP and IAS 12 under IFRS, current tax liabilities and assets are generally offset only when the company has a legal right to offset and intends to settle net, usually because they are owed to the same tax authority. A company that owes tax in one country and is owed a refund in another normally shows both separately.
Companies must also consider uncertain tax positions. If a company has claimed a deduction that might not survive an audit, it records a liability for the unrecognized tax benefit, which may be presented separately from income taxes payable or as a noncurrent liability if not expected to be paid within a year. Interest and penalties on unpaid taxes are typically recorded as part of income tax expense or as interest expense, depending on the company's policy, which must be disclosed.
For analysts, a sharp rise in income taxes payable can indicate higher profits, delayed payments or a dispute with tax authorities. Comparing tax expense with cash taxes paid, shown in the cash flow statement or notes, reveals how much of a company's reported tax is actually being paid in the current year. The broader topic of income tax and the general process of tax filing are covered elsewhere, as is the treatment of other accrued liabilities that arise at period end.