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How to Calculate the Provision for Income Taxes on an Income Statement

Original post by Kathy Adams McIntosh of Demand Media

Every company faces the obligation to file income taxes at the end of the year. Sometimes it reports a profit and needs to pay the tax. Other times the company reports a loss and pays no tax. A provision for income tax considers both possibilities and impacts the company’s net income calculation. The provision for income tax appears on the company’s final income statement. The final income statement represents the version that the company publishes and distributes to investors and creditors. The company needs to consider differences between financial and tax accounting when it calculates the provision for income tax.

Contents

Step 1

Read the preliminary income statement. Locate the net income.

Step 2

Identify any permanent differences on the income statement. Permanent differences refer to transactions that the company records differently for financial accounting than for tax accounting. These include revenues or expenses that are deductible for one set of accounting books, but not the other.

Step 3

Write down the net income. Deduct permanent differences that increase revenue or decrease expenses on the financial accounting income statement. Add permanent differences that decrease revenue or increase expenses on the financial accounting income statement.

Step 4

Identify any temporary differences. Temporary differences refer to transactions that the company records at different times for financial accounting than for tax accounting. These include revenues or expenses that occur at a different time than the company pays for them.

Step 5

Create a schedule for each temporary difference. Write down each transaction and the time period when it impacts tax accounting. Compare this amount to the amount recorded on the income statement.

Step 6

Write down the net income adjusted for permanent differences. Deduct temporary differences that increase revenue or decrease expenses on the financial accounting income statement. Add temporary differences that decrease revenue or increase expenses on the financial accounting income statement.


                   

Tips & Warnings

  • Keep the temporary difference schedules, and update them each year. This eliminates the need to recreate the schedules every year.

References

About the Author

Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.


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