Income Tax Provisions
What Are Income Tax Provisions?
The provision for income taxes is the estimated amount that a business or individual taxpayer anticipates paying in income taxes for the current year. They are reported on an income statement and it is the amount of income tax a company estimates it will pay in a given year. Typically your provisions will be represented quarterly within each earnings report on your company’s income statement.
The exact income tax figure is calculated annually and the company’s final tax bill may be slightly more or less than the estimated payments made throughout the year. This is similar to the taxes withheld from an individual's paycheck. Come tax season, the individual or business will either have to pay the remaining balance or receive a refund for the overpaid amount.
Calculating Tax Rates for Provisions
The effective tax rate is a ratio between your income tax expense (provisions) and your pre-tax income—it's the average taxation rate for a company or individual. The process for calculating the effective tax rate for your company is simple when you have all the necessary information together.
- All the information you’ll need can be found on your company's income statement and balance sheet. You’ll specifically need two pieces of information: your net income and the income tax expense, or provisions.
- To calculate your pre-tax income, you’ll need to add net income to provisions.
- Ex. if your net income was $150,000 and your provision was $33,000, your pre-tax income for the year is $183,000.
- Next, you’ll want to calculate your effective tax rate by dividing your provisions by its pre-tax income, and round to the nearest hundredth percent.
- Ex. take your $33,000 in provisions, and divide it by $183,000. To find the nearest hundredth percent, you’ll take that number and multiply by 100. In this example, your effective tax rate is 18%
Your provisions can be altered to a considerable extent by the amount of tax planning your business does. A well-planned provision can be included in a company’s budget model.
Schedule Tax Service
To learn more about tax provisions, or to learn more about how tax provisions can be built into your company's budget model, reach out to the team at Chandler & Knowles. Our team of expert tax planners can help you better understand your tax planning options and prepare you for an easy tax season.