What is the Income Tax Provision?

Income and tax provision calculation. What is that, exactly, you may be wondering. Simply put, it is the calculation of the amount of income tax your business will owe for the current year.

It’s Complicated . . .

But the income tax provision isn’t really simple at all. Most larger businesses keep their books under Generally Accepted Accounting Principles (GAAP). However, GAAP and the rules promulgated by the IRS for income tax accounting differ significantly, and accounting for these differences is what income tax provision, in reality, is about.

There are two separate categories and calculations within the income tax provision – current tax expense and deferred tax expense.

Current Income Tax Expense

A business’ or company’s current tax expense amount is arrived at by:

• Taking the net income from your income statement, as arrived at under GAAP,
• Taking account of permanent differences between GAAP and IRS-rule accounting. These are items which are permitted for financial statement calculation under GAAP, but not allowed by the IRS, and include entertainment expenses, 50% of certain meal expenses, fines and penalties, life insurance proceeds, and other items. These are added back to the net income as per your financial statements.
• Taking account of temporary differences between GAAP and IRS-rule accounting. These are items which are allowed by both GAAP and the IRS, but not in the same year, such as expenses recorded but not yet incurred, income received but not yet earned, and depreciation and amortization.
• Applying any credits and net Operating Losses (NOL).
• The result represents your current year’s taxable income, on which you can calculate your tax liability at the appropriate tax rate.

Note that, if you are estimating your current tax expense, you may want to add a buffer amount to your estimate, so as not to be caught short if your estimate turns out to be below your actual current tax expense.

Deferred Income Tax Expense

The deferred income tax expense is carried as a liability on your business’ balance sheet, while not yet due for payment. Arriving at your deferred income tax expense is a more complicated process than determining your current tax expense.

It’s a deeper dive into the temporary differences between GAAP rules and tax accounting rules as represented on your balance sheet. Again, these can include:

• Income received but not earned, such as prepaid fees or retainers.
• Expenses recorded on your books but not yet incurred.
• Depreciation and amortization timing differences.

It’s crucial to ensure that all these current differences and temporary differences are accurately reflected on your business’ books for income tax purposes, to avoid an inaccurate calculation of your deferred tax expense, which is the total of all temporary differences multiplied by the applicable tax rate.

We strongly recommend that you consult with your CPA, virtual CFO, or other trusted business advisor to check your income tax provision, and both the current and deferred tax expense estimates, to ensure its completeness and accuracy.

If you would like assistance calculating your business’ income tax provision, or income tax accounting, please click here to email us directly – the RFG team is here to help you!

Until next time –

Peace,

Eric