Dictionary

Income tax expense

The accounting charge for taxes on the period's profit, which is usually not the same as the cash actually paid to tax authorities.

The provision splits into a current portion, roughly what is owed now, and a deferred portion, which reflects timing differences and creates a deferred-tax-liability or deferred-tax-asset. Cash taxes paid are disclosed separately in the footnotes and in the cash-flow-statement.

A gap between the provision and cash taxes is normal. A persistent, widening gap is worth understanding, because it usually means accelerated deductions that will reverse later.

Example: Northwind reports a $33M provision on $132M of pre-tax income but pays $21M in cash, the $12M difference being accelerated equipment depreciation for tax that raises a deferred tax liability.

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