Income Taxes

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

balance sheet, income statement, depreciation, income taxes payable, interperiod income tax allocation, investment tax credit