An explanation of a company's total tax obligations, including current taxes due and deferred tax liabilities, as shown on the balance sheet.
Pennies don't fall from heaven, they have to be earned here on earth.
Total Tax Payable refers to the aggregate amount of taxes a company owes to government authorities as of the balance sheet date. In other words, it is the total tax liability the company has incurred but not yet paid. This typically includes amounts owed for various types of taxes - notably corporate income taxes - as well as other taxes related to the business’s operations. On a balance sheet, Total Tax Payable is part of the liabilities section because it represents an obligation to pay cash to tax authorities in the future (a future outflow of economic benefits).
Components of Total Tax Payable
Total Tax Payable is a broad term that can encompass several distinct tax liabilities owed by a company at the reporting date. Companies may list these items separately or combine them, but they generally include:
- Income Taxes Payable: The corporate income taxes on profits due to federal, state, or foreign governments. This is often the largest component.
- Sales and Use Taxes Payable: Taxes collected from customers on behalf of the government, which the company must remit.
- Payroll Taxes Payable: Taxes withheld from employee paychecks (and the company’s share) that have not yet been paid to the government.
- Excise and Other Taxes: Includes value-added taxes (VAT), property taxes, and other miscellaneous taxes that have been accrued.
How Tax Payable Is Calculated
The calculation for current income tax payable starts with the company’s taxable income, which is its accounting profit adjusted for differences required by tax law. The tax liability is the tax due on this profit, net of any prepayments.
Formula:
Tax Expense vs. Tax Payable
The tax expense on the income statement will not exactly equal the taxes payable on the balance sheet. Tax expense represents the total tax cost related to the period’s profits under accounting rules, while tax payable is the actual cash liability owed at that date. The difference is usually due to deferred tax items.
“Pennies don’t fall from heaven, they have to be earned here on earth.”
— Margaret Thatcher, Prime Minister of the United Kingdom (1979-1990) Speech at Lord Mayor’s Banquet, London (1979)
Current vs. Deferred Tax Liabilities
In accounting, a company’s total tax obligation is split into two main categories to reflect the timing of payments:
- 1. Current Tax Payable (Current Tax Liabilities): These are taxes due in the short term, usually within the next year. This includes the income tax for the current period, as well as sales, payroll, and property taxes. They are always classified as a current liability.
- 2. Deferred Tax Liabilities: These represent taxes that have been accrued for accounting purposes but are not due to be paid yet. They arise from temporary differences between accounting rules and tax rules. For example, if a company uses an accelerated depreciation method for tax purposes but straight-line for its financial statements, it pays less tax now but will have to pay more in the future. This future obligation is the deferred tax liability.
In essence, a deferred tax liability means the company has ‘underpaid’ taxes for now relative to its accounting profit and expects to make up the difference in the future when the timing differences reverse. They are presented as non-current liabilities because the payment is not due within the next year.
Presentation on the Balance Sheet
On the balance sheet, tax liabilities are clearly separated to give users insight into short-term and long-term obligations.
- Current Liabilities Section: This section includes Income Taxes Payable (or ‘Current Tax Liabilities’), which shows the amount of income and other taxes due within one year.
- Non-Current Liabilities Section: This section includes Deferred Tax Liabilities, representing the accumulated taxes that will come due in future years.
Analysts often add the current and deferred portions to understand the total tax burden on the company. Accounting standards like U.S. GAAP and IFRS require this distinct presentation for transparency, as tax authorities are priority creditors.
GAAP vs. IFRS: Terminology and Treatment
Both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) follow similar principles for tax accounting, with minor differences.
- Terminology: U.S. GAAP commonly uses the term “Income Taxes Payable” for the current liability. IFRS often uses “Current Tax Liabilities.” The meaning is essentially the same.
- Core Concept: Both standards focus on profit-based taxes when discussing income tax. Other taxes like sales or payroll tax are typically handled as separate operating liabilities.
- Deferred Tax Classification: Historically, GAAP allowed splitting deferred taxes into current and non-current portions. However, a modern update aligned GAAP with IFRS, and now both standards require all deferred tax liabilities and assets to be classified as non-current.
Harmonization of Standards
The alignment of GAAP and IFRS on classifying deferred taxes as non-current has made financial statements more comparable globally. In modern reports under either standard, you will typically see one net deferred tax liability or asset in the long-term section.