Besides sales taxes and payroll deductions, a company must also remit corporate income taxes to the government. A company’s income taxes are based on the amount of income, net of expenses, reported on its annual income statement. 1 It is one of the last adjusting entries made at a company’s year-end.
For instance, assume BDCC reported revenues of $500,000 and expenses before corporate income taxes of $400,000 for the year ended December 31, 2015. If the corporate income tax rate is 20%, BDCC would pay corporate income taxes of $20,000 [($500,000 – 400,000} x 20% = $20,000].
Often, profitable companies are required to remit income tax instalments to the government on a monthly or quarterly basis. Instalment calculations are beyond the scope of this text but are often influenced by the amount of corporate income taxes paid in the prior year by a company.
Assume that BDCC is required to make monthly corporate income tax instalments during 2015 of $1,500 and that these amounts must be paid to the government by the 15th day of the following month. If the payment for January 2015 was made by February 15, the journal entry would be:
After the payment on December 15, 2015, the balance in the Corporate Income Taxes Payable general ledger account would be a $16,500 debit balance ($1,500 x 11 mos.). Various adjusting entries would be made to prepare the BDCC financial statement for the year ended December 31, 2015, resulting in income before income taxes of $100,000 as noted above. This figure is used as a basis to prepare the corporate tax return for the year. Assuming a tax rate of 20%, BDCC’s corporate income taxes payable will amount to $20,000. Since the company has already paid $16,500 in corporate income tax instalments for the 2015 fiscal year, it only owes an additional $3,500 at December 31, 2015. The adjusting entry to record the corporate income taxes expense and adjust the amount owing would be:
The condensed BDCC income statement at December 31 would show:
The $3,500 balance in the Corporate Income Taxes Payable general ledger account would be shown as a current liability on the balance sheet at December 31, 2015. BDCC will pay this amount in cash sometime in 2016 after the income tax return has been assessed by the government.
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