Income Tax Expense -> two ways of calculating it?

Hi there,

I’ve seen an old post about this topic, but I couldn’t find a definitive answer.

Accounting profit (earnings before taxes) = $250,000
Taxable income = $215,000
Tax rate = 30%
Change in DTL = $8,250

What is the Income tax expense?

  1. Income tax expense = Income tax payable + DTL = $72,750

However, according to the book, Income tax expense is also defined as:

Reported effective tax rate = Income tax expense / Pretax income (accounting profit)

So in this case

  1. Income Tax Expense = Pretax income (Accounting profit) * Tax rate = $64,500

What am I missing?


Effective tax rate and Income tax expense are two different concepts. Let me try to clarify:

The key idea is that the only differences that should stay between pre-tax income and taxable income are the temporary ones.

Having that said, if you have a permanent difference you need to adjust it in the pre-tax income to arrive at an “adjusted pre-tax income”. When there are permanent differences, the statutory tax rate (that is the regular one, like 35% or 30%) differs from the effective tax rate. To calculate what the effective tax rate is, you do: Income tax expense (that already includes this permanent difference adjustment) / Pre-tax income (without the permanent difference adjustment).

Then in regards to the Income Tax Expense calculation, the base formula is:
Income tax expense = Income tax payable + DTL movements - DTA movements

Hope that helps.

The question does not give you a reported tax rate. That is calculated post production of accounts.

Note the change in DTL x tax rate (250 - 215) x 35% = 10.5 is not equal to 8.25. There must be other things going on that we don’t know about. ie. not all the difference between 250 and 215 may be temporary differences that will be reversed later.