Tax Expense: What It Is?
It’s no secret that most individuals pay a standard income tax percentage back to the government. But do you know how each taxable income figure works? Taxable income expenses can vary depending on a few different things.
You need to consider income before taxes, federal income taxes, and income tax deductions. So where do you start and what do you need to know about tax expenses? Read on to learn how to calculate them, how they work, and an example!
Table of Contents
KEY TAKEAWAYS
- A tax expense is the amount of tax that an individual or a corporation owes to the tax authority
- To calculate income tax expenses, take your taxable income and multiply it by the appropriate tax rate
- There can be a range of tax expenses that can get levied against the value of an asset, such as estate taxes
What Is a Tax Expense?
A tax expense is an amount of money that you owe to the government. This can be on the federal level, the state level, the municipal level, or a combination. These tax expenses are liabilities that are owed over the course of a year.
How to Calculate a Tax Expense
Calculating tax expenses can sometimes be a challenge since there can be many types of income that are subject to various levels of taxes. To calculate, all you need to do is multiply your individual tax rate by your income received before taxes.
Itās important to recognize that you also need to factor in other variables, such as tax liabilities, tax assets, and any non-deductible items. The formula to calculate a tax expense would look like this:
What Are Tax Expense Deductions?
Tax deductions refer to specific amounts you can subtract from your taxable income. Doing this allows you to reduce the total amount of taxes that you owe. You can do this by taking the standard deduction, which is a fixed amount.
Or, you can itemize your deductions using Schedule A of your income tax return. Itemizing your expenses can often be more beneficial if the total amount exceeds the standard deduction amount.
Some of the most common tax expense deductions include mortgage interest, student loan interest, state and local taxes, and certain charitable contributions, among others.
Tax Expense vs Tax Payable
There are many things to consider when calculating tax expenses. Businesses cannot always fully anticipate the exact tax amount they will have to pay. Throughout the business operations, as a business, you do your best to record and accrue tax expenses on your income statement and tax liability on your balance sheet.
When a tax year is complete, you can calculate the accurate business tax owed by following the Internal Tax Code (IRC). Sometimes the actual amount owed is more than the amount recorded, which then requires accounting adjustment entries, and the amount you owe is the amount that the business needs to pay.
Summary
A tax expense is a specific amount that you owe to certain governments within a specific timeframe. This could be federal, state, municipal, or a combination of the three. The tax expense is usually owed over the course of a year and itās considered a liability.
To calculate tax expenses, you multiply your tax rate by your taxable income. Itās important to consider other variables such as tax liabilities, tax assets, and other non-deductible items.
FAQs About Tax Expense
Tax expenses outlined on an income statement are determined to be owed taxes. These amounts are determined based on the standard business accounting rules.
Companies will record their income tax expenses as a debit. They will also record their income tax payable as a credit when they complete the appropriate journal entries because expenses and liabilities are recorded in one entry.
Income tax expense has two components. The first is the current income tax, which is based on the taxable income for the current year. The other component is deferred income tax, which relates to the movement of a deferred tax asset or liability.
Essentially, a corporation must pay any and all taxes on profits. Taxes arenāt deductible as business expenses.
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