What is the Provision for Income Taxes?

A provision for income taxes is the estimated amount that a business or individual taxpayer expects to pay in income taxes for the current year. The amount of this provision is derived by adjusting the firm’s reported net income with a variety of permanent differences and temporary differences. The adjusted net income figure is then multiplied by the applicable income tax rate to arrive at the provision for income taxes.

This provision can be altered to a considerable extent by the amount of tax planning that a person or business engages in to defer or eliminate the income tax liability. Consequently, the proportional size of this provision can vary significantly from taxpayer to taxpayer, based on their tax planning abilities.

Budgeting for the Provision for Income Taxes

A planned provision for income taxes can also be included in a company's budget model. In a well-crafted model, this planned provision would include both permanent and temporary differences. In a more basic model, the provision is simply based on the applicable tax rate.

Presentation of the Provision for Income Taxes

The provision for income taxes is stated within the current liabilities section of the balance sheet. A sample presentation appears in the following exhibit.