Prior to discussing how to calculate income tax expense, lets define it. Income tax expense is a type of expense which is to be paid by every person or organization on the income earned by them in each financial year as per the norms prescribed in the income tax laws.
Income tax is arrived at by showing only the tax expenses that occurred during a particular period when they were incurred and not during the period when they were paid.
This type of tax involves an outflow of cash hence, it is seen as a liability for the company. Therefore, companies try to minimize their tax expenses because otherwise, they would eat into the profits.
The income tax is levied on taxable income only. So if a company is running in losses, it has zero taxable income.
The income tax expense is reported as a line item in the corporate income statement, while any liability for unpaid income taxes is reported in the income tax payable line item on the balance sheet.
Formula to Calculate Income Tax Expense.
Suppose a company’s taxable income is $ 500,000 and the state’s tax rate is 5%. Find the income tax expense.
Therefore, the company’s income tax expense is $ 25,000.