Tax Terminology

Taxable income:
Income used for calculating income taxes in tax accounts. (tax terms)

Taxes payable (a.k.a. current tax expense):
Actual taxes owed to IRS based on taxable income. (tax term)

Taxes paid:
Cash paid to IRS, include payments or refunds from other periods.(Tax term)

Tax loss carryforward:
Used to reduce taxable income in future years (tax term, treated as deferred tax asset in financial statement if it is likely to recover othewise create a valuation allowance)

Pretax income (EBT):
Income before tax reported in financial accounts. (FS term)

Income tax expense:
Tax calculated based on EBT in financial statements.(FS term)

Income tax expense = tax payable + deferred incoeme tax expenses.

Deferred income tax expense
Difference between taxes payable & income tax expenses (FS term)

Timing differences
Differences between income tax expense and taxes payable that lead to the creation of deferred tax (DT) assets (expected to be recovered from future operations) and DT liabilities (expected to result in future cash outflows).

Deferred tax liability:
Occur when income tax expenses is greater than taxes payable e.g. resulted from difference depreciaton methods are used in tax & financial statements.

Deferred tax asset:
Occur when income tax expenses is smaller than taxes payable e.g. due to warranty expense (as warranty expense cannot be recognized until incurred for tax purposes)

Valuation allowance:
If the chance that a deferred tax asset will not be realized is over 50%, it becomes doubtful and a reserve must be set up against it.