[guscusi]

What is the journal entry for the payment of Income Taxes?

Eg: FY closed as follows...

Net Income 50,000
Income Tax: 15,000

I suppose the process and journal entries in the GAAP statements (not the IRS version) would be:

a) When closing the FY and determining the Inc. Tax (in order to reduce the Retained Earnings available to shereholders after the payment):

Retained Earnings (Debit): 15,000
Income tax payable (Credit): 15,000

b) Then,. when Paid:
Income Tax Payable (Debit): 15,000
Checking Account: 15,000

Am I correct?

Thanks in advance...

Shouldn't the income tax paid be shown also in the Retained Earnings Statement?

Thanks!

[ArcSine]

Typically the debit in your part (a) would first hit the P&L as "Income Tax Expense". Of course, it then finds its way into Retained Earnings via the closing of your P&L.

So your Inc Statement will have the full tax expense, but you'll only deduct the state portion of the tax on your federal return. The non-deducted federal portion of the tax expense will be a reconciling item in Schedule M of your corporate return (the "book - tax diffs").

Given that, it might be helpful to have both "Federal Income Tax Expense" and "State Income Tax Expense" on your Income Statement, since the latter is deductible on your federal return, while the former is not.

[guscusi]

Typically the debit in your part (a) would first hit the P&L as "Income Tax Expense". Of course, it then finds its way into Retained Earnings via the closing of your P&L.

So your Inc Statement will have the full tax expense, but you'll only deduct the state portion of the tax on your federal return. The non-deducted federal portion of the tax expense will be a reconciling item in Schedule M of your corporate return (the "book - tax diffs").

Given that, it might be helpful to have both "Federal Income Tax Expense" and "State Income Tax Expense" on your Income Statement, since the latter is deductible on your federal return, while the former is not.

Very clear. Thanks again.

I understand. So, if there were a journal entry for that Schedule M, would it be like this?

Retained Earnings 15,000 (Debit)
Income Tax 15,000 (Credit)

Thank you.

[ArcSine]

No, Sch M doesn't have anything to do with journal entries... and in hindsight I may have just muddied the water by bringing it up, since you were asking about the appropriate JE.

Going back to the beginning, you'd make a JE that would hit your books this way:
Debit Income Tax Expense (an Income Statement expense account)
Credit Income Tax Payable (Balance Sheet liability account)

Then when you close your P&L, Retained Earnings will automatically be reduced by the income tax expense, because the expense reduced your year's net income, via that JE above.

In other words, just treat the income tax expense as any other accrued expense at year end.

Later, when you pay the tax, you'll simply debit the liability.

[guscusi]

Pefect,. now I understand.

Thanks again for your clear explanations. Have a nice weekend!

[morgaine300]

I'm assuming this is a C corp..

You do have to account for the differences between your book tax and your "IRS" tax. That's what the Sch. M is for.

That is, what you report as income tax expense on your books is the tax that would be on your book income. But what about your taxable income? Those usually aren't the same. There's two types of differences:

*Permanent differences. For instance, travel & entertainment. You can't count all that as expense for your taxes, so that changes taxable income. In this case, you're going to be going by what the applicable portion for taxable income is and using that for book tax as well.

*Temporary differences. A common example is depreciation. Like if you use straight-line, that will come out differently than the MACRS you must use for tax. But all that does is change the timing of when the expense is taken. So the book and tax would eventually match up over however many years, but when you book the tax expense and when the IRS wants the tax will be at different times.

The latter has to be taken care of via either an asset or liability account, depending on the circumstances. (Which is the NET of all differences.)

I realize that isn't a very good explanation and wasn't meant to be. That's because I'd have to know exactly what's going on with your books, not to mention that I'd have to be a tax expert, which I'm not. If I have the numbers, I can figure out how to do the entries. (I can give some examples though, if you want to better understand the concept.)

I brought it up because it's something you need to consider. If it's something you're not aware of, then it might be better to have an accountant doing it for you anyway.

[rehmanvohra]

In your post, you have said:
Shouldn't the income tax paid be shown also in the Retained Earnings Statement?

Income tax paid appears in the Statement of Cash Flows and not the retained earnings statement. I am sure you must have read that a retained earnings statement shows:
Balance brought forward
Net Income after taxes
Less:
Dividends paid
Appropriations made
Balance carried forward

[guscusi]

I'm assuming this is a C corp..

You do have to account for the differences between your book tax and your "IRS" tax. That's what the Sch. M is for.

That is, what you report as income tax expense on your books is the tax that would be on your book income. But what about your taxable income? Those usually aren't the same. There's two types of differences:

*Permanent differences. For instance, travel & entertainment. You can't count all that as expense for your taxes, so that changes taxable income. In this case, you're going to be going by what the applicable portion for taxable income is and using that for book tax as well.

*Temporary differences. A common example is depreciation. Like if you use straight-line, that will come out differently than the MACRS you must use for tax. But all that does is change the timing of when the expense is taken. So the book and tax would eventually match up over however many years, but when you book the tax expense and when the IRS wants the tax will be at different times.

The latter has to be taken care of via either an asset or liability account, depending on the circumstances. (Which is the NET of all differences.)

I realize that isn't a very good explanation and wasn't meant to be. That's because I'd have to know exactly what's going on with your books, not to mention that I'd have to be a tax expert, which I'm not. If I have the numbers, I can figure out how to do the entries. (I can give some examples though, if you want to better understand the concept.)

I brought it up because it's something you need to consider. If it's something you're not aware of, then it might be better to have an accountant doing it for you anyway.

Thank you, Morgain300. I did understand your point, which is clear after looking at Sch. M. and also very logical. Thanks again.