What is Provision for Income Taxes?
A provision of income taxes is an item that is found in the profit and loss statement of a company which shows the amount of money that is set aside to pay income taxes. Income tax payment schedules for businesses are determined by the government. Some companies may be required to pay quarterly, while others by annually. Companies, in an effort to stay current with their tax liabilities, place money into an account each month to cover this debt. This entry is used to track the money until it is debited to pay the taxes.
Is A Provision Of Income Taxes Necessary In All Company Accounting Methods?
All companies should use this provision to save for their income taxes. It is a way to properly track the money that is coming into the company and how it is being distributed. A company may set aside a special bank account for the use of paying income taxes, but it will still be registered under this line in the bookkeeping. This is especially important in the event that the company is ever audited. Companies, during a tax audit, need to account for every dollar that is taken in and sent out. By being able to prove that a specific amount each month was set aside for taxes, an audit will run smoother.
Are Income Taxes Different For Businesses Than For Individuals?
All entities, whether private or business, are required to pay income taxes. Businesses, however, are charged at a different rate than an individual and often pay more frequently. Businesses generally pay their income taxes quarterly, while individuals are required to file their taxes once a year. Much like the weekly payments that individuals set aside for their taxes out of their paychecks, businesses use a provision of income taxes in their accounting methods to accomplish the same thing.