Income Tax Expense vs. Taxes Payable

CFA Level I
#1

I think it’s universally accepted that the bane of most CFA candidates is study session 9 and specifically Income Taxes for me. I am having some difficulty differentiating the terms income tax expense and taxes payable. Taxes payable is the tax liability that must be paid to the government, while income tax expense is on the income statement and is the taxes payable plus any increase in DTL minus any increase in DTA? Does this mean that income tax expense isn’t a cash outflow and not the actual amount owed to the government? Could anyone help shed some light on this for me. Thanks

#2

Of course it is not! Tax expense takes into account not only the real cash outflow - related to the taxes payable this year but alos the portion of taxes due to temporary differences between accounting income and tax basis. The total P&L tax expense consists tax payable plus change in DTA and DTL. The portion relating to deferred taxes is not a real cash outflow…

#3

Tax Expense = Tax Payable + Delta_DTL - Delta_DTA. www.core-models.com has a model exclusively dedicated to teaching you how Depreciation and Deferred Tax are related. It might better help you understand this concept.

#4

I wrote down below after my attempt at understanding Income taxes. Please correct me if I am wrong. Revenue :100 per year Cost of machinery : 100 No. of years useful = 5 Straight line depreciation for Income Statement = 20 per year Double Declining for Tax Statement=40 for 1st year Income State: 100 (rev) - 20 (SL dep) = 80 (Taxable Income) 80*.3 = 24 (Taxes payable) Tax Statement: 100 (rev) = 40 (DD dep) = 60 (Pre-tax incme) 60* .3 = 18 (Income tax expense) 24 - 18 = 6 = Deferred tax liability From the above example below equation doesnt hold good. Have I missed something? Tax Expense = Tax Payable + Delta_DTL - Delta_DTA 18 = 24 + 6 ??

#5

^ Taxes according to the income statement are “income tax expense”, not taxes payable - TP is the tax according to the tax statement.

#6

Thanks brafique. Now it makes sense Revenue :100 per year Cost of machinery : 100 No. of years useful = 5 Straight line depreciation for Income Statement = 20 per year Double Declining for Tax Statement=40 for 1st year Income State: 100 (rev) - 20 (SL dep) = 80 (Taxable Income) 80*.3 = 24 (Income tax expense) Tax Statement: 100 (rev) = 40 (DD dep) = 60 (Pre-tax incme) 60* .3 = 18 (taxes payable) Income Tax expense = taxes payable + DTL 24 = 18 + 6

#7

Alright, this concept is starting to crystalize a bit. I didn’t realize that taxes payable was on the tax statement and not the a companies financial income statement. In non-accounting lingo, tax expense is what is currently owed to the govenment (TP), plus any deferred tax liabilites, net of deffered tax assets. Makes sense. Thanks everyone.