Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated October 16, 2020

What is a Tax Expense?

Tax expense is the amount of tax owed in a given period. It appears on the income statement.

How Does a Tax Expense Work?

The formula for tax expense is:

Tax Expense = Effective Tax Rate x Taxable Income

For example, let's assume the Company XYZ has an effective tax rate of 35%. The company's taxable income (that is, income net of tax deductions and non-taxable items) is $1,000,000. According to the formula, Company XYZ's tax expense would be:

Tax Expense = $1,000,000 x 0.35 = $350,000

Of course, in the real world, calculating tax expense is far more complicated. Certain types of income are subject to certain levels of taxation. For example, employers must pay payroll taxes on wages, sales taxes on certain asset purchases and excise taxes on still other purchases, in addition to state and local taxes, both of which have their own rules for what income is taxable or not taxable.

Why Does a Tax Expense Matter?

Tax expense often has a large effect on a company's net earnings, because in some cases as much as 30%, 40%, or even 50% or more of a company's profits may go to various state, local, and federal governments. This can dramatically reduce the amount left for the shareholders, who may then pay taxes a second time if the company pays a dividend.

Alternatively, when companies do not have taxable income, they do not record a tax expense. In fact, they are usually allowed to carry their losses forward to offset or eliminate future taxes as well.

It is important to note that tax expense is not the same as tax liability. A tax liability is a balance sheet item that denotes the amount of tax that is expected to be paid in the future.

Ask an Expert about Tax Expense
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Tax Expense.
Be the first to ask a question

If you have a question about Tax Expense, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Tax Expense, then please ask Paul.

Ask a question Read more from Paul

Read this next

Don't Know a Financial Term?
Search our library of 4,000+ terms
Paul Tracy - profile
Ask an Expert about Tax Expense

By submitting this form you agree with our Privacy Policy

Share
close