Prepaid Income Tax

Prepaid Income Tax

In accounting, Prepaid Income Tax is defined as an asset listed on the balance sheet that represents taxes that have been already paid despite not yet having been incurred. It is also called a deferred income tax asset.

Prepaid Income Tax Explanation

Prepaid income tax is a form of prepaid expense. The most common reason why prepayment on income taxes occurs is due to over-estimation of tax deposits. In this situation, taxes are estimated from the financial records of the previous year. These estimated taxes are paid. Then, when the year-end taxes are found to be less than the taxes paid earlier, prepayment on income taxes has occurred. This prepayment can create one of two results. Either it results in a tax refund or the credit written off towards the tax liability of the next period.

[box](NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFOs. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)[/box]

The difference between prepaid income tax and a deferred tax asset is that prepaid income tax occurs within one year. Conversely, a deferred income tax asset can occur for a period of longer than one year.
Often, prepaid income taxes are the result of poor assumptions. Generally, company controllers overestimate the needed tax deposits. In conclusion, this is one of the most common cases leading to prepaid income taxes.

Prepaid Income Tax Journal Entry

The following is what the prepaid income tax journal entry may look like:
DR                                                    CR
Prepaid Income Tax               $100,000
Cash                                                                                              $100,000
Income Tax Expense              $25,000
Prepaid Income Tax                                                                   $25,000
Result: Prepaid income tax balance = $75,000
Download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.
Prepaid Income Tax

[box]Strategic CFO Lab Member Extra
Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

Prepaid Income Tax
See Also:
Marginal Tax Rate
Tax Brackets
Flat Tax Rates
Cash Flow After Tax
Unclaimed Property

ARTICLES YOU MIGHT LIKE

Tax Brackets

See Also: Marginal Tax Rate Prepaid Income Tax Ad Valorem Tax Deferred Income Tax Cash Flow After Tax Tax Brackets What are tax brackets? Tax brackets are levels of taxation determined by income. Individuals with income falling within a certain tax bracket pay taxes according to the stated rate for that bracket. Typically, lower income

Read More »

Impact of FIT on Sustainable Growth Rate

The Institute of Fiscal Studies authored a study on tax systems in the UK called “Tax by Design: Mirrlees Review.” They concluded that “in the long-run, the tax system should be judged in part on its impact on the sustainable growth rate of the economy… viewing efficiency in a dynamic as well as static sense.” As we

Read More »

W2 Form

See Also: 401k Cash Flow After Tax Deferred Income Tax Form 1098 Marginal Tax Rate W2 Form Definition The W2 form definition is used by employers to report employees‘ wages to the Internal Revenue Service (IRS). The W-2 is also used to report the amount of taxes that have been withheld from each paycheck. W2

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

September 12-15th 2022

Days
Hours
Min
SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ WORKSHOP SERIES

Strategic CFO™ Financial Leadership Workshop
The Art Of The CFO®

Days
Hours
Min

December 5-8th, 2022