Definition
The term income tax is used to describe federal and state tax obligations payable on individual or business income. Income taxes are computed by completing tax forms available from the Internal Revenue Service.
Explanation
Generally, the form and content on an income tax return is similar to the income statement for a company. Taxable income appearing on a tax return is computed using rules established by the IRS. Individuals and companies may also be offered both tax credits and deductible expenses, which serve to lower taxable income. For example, companies may be able to claim accelerated depreciation on an IRS tax form.
The tax revenue paid to a federal, state or local government is used to provide a wide variety of essential public services and programs. Examples include military / defense, law enforcement, health care, retirement income, unemployment benefits, and education.
Accounting income is measured according to Generally Accepted Accounting Principles, or GAAP. This calculation method results in the income taxes that are expensed by a company as shown on the income statement. The difference between the taxes due a government agency and the taxes payable in a given fiscal period results in an inter-period tax allocation.
While the income taxes payable for a company appears on the income statement; the inter-period tax allocation, known as deferred income taxes, appears in the liabilities portion of the balance sheet.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.Moneyzine EditorNovember 6th, 2024
The financial accounting term depreciation is sometimes defined as a decline in tangible plant's service potential. Depreciation is a method of allocating the cost of a tangible asset in a systematic manner to those time periods that benefit from the use of the asset.Moneyzine EditorJanuary 16th, 2024
The financial accounting term income taxes payable is used to describe money owed to government authorities but not yet paid. Income taxes payable appears in the current liabilities section of the company's balance sheet.Moneyzine EditorNovember 6th, 2024
The financial accounting term interperiod income tax allocation refers to the distribution of income tax expense between accounting periods. This occurs due to a timing difference between taxable income and the accounting income appearing in the company's financial statements.Moneyzine EditorJanuary 22nd, 2024
The term investment tax credit refers to a number of business credits characteristically used by government entities to stimulate an economy. Typical credits include disaster relief, research and development, non-petroleum fuels, and alternative fuel vehicles.Moneyzine EditorJanuary 23rd, 2024
