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.

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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

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Prepaid Income Tax

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Prepaid Income Tax

See Also:

Marginal Tax Rate
Tax Brackets
Flat Tax Rates
Cash Flow After Tax
Unclaimed Property

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6 Responses to Prepaid Income Tax

  1. trim April 9, 2016 at 3:02 pm #

    Continuing with the same example, if the Prepaid income tax balance is $75,000 then a end-year refund of that prepayment is expected to be $75,000. What’s the journal entry for the refund? I understand Prepaid Tax is to be further credited, but what’s the respective debit, Cash or Expense or both. If both, then it won’t be equal because there are two debits for one credit. This I could not understand.

    Cr Prepaid Tax 75,000
    Dr Cash 75,000

    What about the Tax Expense?

    • LEA November 17, 2017 at 6:51 pm #

      the refund of $75000 does not affect the tax expense account.

      The GJ entry you have noted is all you need.

  2. brown April 15, 2016 at 6:43 am #

    Debt income tax expense by $25000
    credit prepaid income tax by $25000

  3. Qaiser khan April 23, 2019 at 6:24 am #

    continuing with the same example, if i want to refund the deferred tax asset in my accounts what will be the entry…
    and if i am paying tax for the period and want to settle against it with the DTA, what should be the double entry.

  4. unknown May 12, 2019 at 5:57 am #

    what if tax expenses is $2200000, tax paid is $2250000.. what would be the journal entries? is that
    dr. Prepaid tax $50000
    cr. Cash. . $50000

  5. DJames August 12, 2019 at 8:34 am #

    what would be the entry once the tax return is complete and the overpayment amount of say $20k is noted and the overpayment will be applied to the following years taxes not refunded. Is the entry below correct:

    Dr. Prepaid Taxes (asset)
    Cr. Income Taxes Payable (liability) ?? (not sure on this one)

    In this example cash is not involved because the overpayment will be applied to future taxes not received as a refund. or is there no entry needed at all since this will just sit with the tax authority.

    Also does it matter if one debited prepaid taxes or DTA? I know the difference is due to the length of time of the timing difference but conceptually are they the same thing?
    thanks for all the help.

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