Updated for the 2026-2027 CFA® Level I curriculum.
A company's income statement and its tax return almost never report the same income number. This happens because financial reporting standards and tax law measure income differently. CFA Level I tests whether you can tell these measures apart and connect them using one relationship. Get this relationship right and the rest of the income tax reading becomes much easier.
Quick Answer
Accounting profit is pretax income under financial reporting rules; taxable income follows tax law. Current tax expense is the period's current tax charge. Taxes payable is the unpaid balance after opening liabilities, current charges, and payments are reconciled. Income tax expense includes current tax expense plus the net deferred tax charge recognized in profit or loss.
Key Takeaways
Accounting profit (pretax income) follows IFRS or US GAAP rules and appears on the income statement before tax.
Taxable income follows tax law and is the base used to calculate the amount owed to tax authorities.
Taxes payable is the current tax liability. It equals taxable income multiplied by the applicable tax rate.
Income tax expense includes the current and deferred tax charges recognized in profit or loss. Current taxes payable is an unpaid balance-sheet liability, which also depends on payments and opening amounts.
Income tax expense links current and deferred tax charges. A separate current-tax roll-forward links the current charge to taxes payable and cash paid.
Intraperiod tax allocation spreads total income tax expense across continuing operations, discontinued operations, and other comprehensive income so each component carries its own tax effect.
What You Need to Know for CFA Level I
The LOS asks you to contrast these four measures, not just define them. Expect questions that test whether you can tell which measure applies to which statement.
Accounting profit and taxable income are starting points. Taxes payable and income tax expense are the outputs calculated from them.
Income tax expense equals current tax expense when the net deferred tax charge recognized in profit or loss is zero. Permanent differences can affect the tax rate without creating deferred tax.
This note stops at the relationship between the four measures. The reasons accounting profit and taxable income diverge, including temporary and permanent differences and tax bases, belong to the next note.
The main trap is treating taxes payable and income tax expense as interchangeable. They answer different questions: one is cash owed now, the other is total tax cost recognized this period.
Accounting Profit: The Financial Reporting Number
Accounting profit, also called pretax income or pretax financial income, is income before tax calculated under IFRS or US GAAP. It appears near the bottom of the income statement, right above income tax expense. Management prepares the statements under financial reporting rules; the auditor independently assesses them.
Analysts use accounting profit to judge operating performance. It reflects accrual accounting, matching revenues to the period earned and expenses to the period incurred, regardless of when cash tax is actually paid.
Taxable Income: The Tax Return Number
Taxable income is income calculated under the tax code of the relevant jurisdiction. Tax authorities set their own rules for revenue recognition, expense deductibility, and timing. These rules often differ from financial reporting standards.
Taxable income never appears on the income statement. It lives on the company's tax return and is the base for computing the actual tax bill for the period.
Taxes Payable: The Current Tax Liability
Current tax expense is the tax charge attributable to the period's taxable income. Taxes payable is the unpaid liability after considering payments, prior balances, and other adjustments. The simplified examples assume no such payment or opening-balance effects. The calculation is direct:
Taxes payable = Taxable income × Applicable tax rate.
This is a balance sheet liability until paid. It reflects only the cash tax obligation created by taxable income. It does not include any deferred tax effects.
Income Tax Expense: The Income Statement Number
Income tax expense is the tax cost reported in profit or loss for the period. It includes current tax expense and the applicable deferred tax expense or benefit. The current charge equals closing taxes payable only under simplifying assumptions about opening balances, payments, and other adjustments.
Income tax payable = Current tax expense + ∆DTL - ∆DTA.
where:
Current tax expense: the tax charge on current-period taxable income, distinct from the unpaid closing liability,
∆DTL: change in deferred tax liabilities during the period, and
∆DTA: change in deferred tax assets during the period.
Use only deferred tax changes recognized in profit or loss in this simplified reconciliation; changes recorded in OCI, acquisitions, or other components require separate treatment. When a company has only temporary differences and no permanent differences, income tax expense equals accounting profit multiplied by the tax rate, even though taxes payable is calculated from a different number.
Intraperiod Income Tax Allocation
Total income tax expense for a period is not always charged entirely against continuing operations. Intraperiod income tax allocation assigns portions of total income tax expense to the specific statement components that created the tax effect: continuing operations, discontinued operations, and items reported in other comprehensive income. This keeps each component's tax effect tied to the item that generated it, instead of lumping all tax expense under continuing operations.
For Level I, you only need to recognize that income tax expense reported on the income statement for continuing operations may not equal the company's total tax expense for the period once discontinued operations or OCI items are involved.
Working Example
A company reports an accounting profit (pretax income) of $800,000 for the year under IFRS. Its tax return shows taxable income of $650,000 for the same year, due to a temporary difference from accelerated tax depreciation. The enacted tax rate is 30%. There are no permanent differences.
Step 1: Calculate taxes payable
Taxes payable = $650,000 × 30% = $195,000.
Step 2: Calculate the deferred tax effect
Difference between accounting profit and taxable income = $800,000 - $650,000 = $150,000.
Deferred tax liability created = $150,000 × 30% = $45,000.
Step 3: Calculate income tax expense
Income tax expense = Taxes payable + ∆DTL = $195,000 + $45,000 = $240,000.
Since there are no permanent differences, income tax expense should also equal
Accounting profit × Tax rate: $800,000 × 30% = $240,000.
The two methods agree.
The company owes $195,000 in cash taxes this year based on its tax return. But its income statement reports $240,000 in tax expense because accounting profit is higher than taxable income. The $45,000 difference is deferred, not avoided, and will reverse in a future period.
Separate the Tax Charge, Cash Payment, and Closing Liability
Continue the example with current tax expense of $195,000 and deferred tax expense of $45,000. Now assume opening current taxes payable are $20,000 and cash taxes paid during the year are $180,000. There are no refunds, acquisitions, prior-year true-ups, or other adjustments.
Closing taxes payable = $20,000 + $195,000 - $180,000 = $35,000.
Three different figures now coexist:
Income tax expense of $240,000 reduces reported profit.
Cash taxes paid of $180,000 reduce cash.
Closing current taxes payable of $35,000 remain on the balance sheet.
The $195,000 current tax expense is the period's tax charge on taxable income. It is not the unpaid closing balance once opening liabilities and payments are included.
The total expense-to-cash difference is $60,000. Of that amount, $45,000 is the deferred tax charge and $15,000 is the increase in current taxes payable. This bridge explains why the cash payment cannot be inferred from total tax expense alone.
The simplified current-tax formula earlier in the note assumes no opening payable and no payments. Use a roll-forward when the question supplies either of those additional facts.
Common Exam Traps
Treating taxes payable and income tax expense as always equal
They match when the net deferred tax charge recognized in profit or loss is zero. Permanent differences need not create a difference between current and total tax expense. Always check which number the question is asking for.
Using taxable income to calculate income tax expense
Income tax expense is tied to accounting profit, not taxable income. Taxable income determines taxes payable.
Reversing the deferred tax direction
For deferred tax movements recognized in profit or loss, an increase in DTL raises tax expense relative to current tax expense, while an increase in DTA lowers it. Changes recorded in OCI, acquisitions, or other locations must be separated.
Confusing this topic with temporary and permanent differences
This note covers what each measure is and how they connect. The reasons behind the gap between accounting profit and taxable income are covered in the next note on temporary versus permanent differences and tax bases.
Forgetting intraperiod allocation exists
Candidates sometimes assume all income tax expense sits in continuing operations. Items like discontinued operations and OCI can carry their own tax allocation.
Practice Question
A company reports accounting profit of $800,000 under IFRS for the year. Due to a temporary difference, taxable income for the same year is $650,000. The enacted tax rate is 30%. There are no permanent differences. What is the company's income tax expense for the period?
$195,000
$240,000
$45,000
Correct Answer: Option B
Income tax expense equals accounting profit multiplied by the tax rate when no permanent differences exist: $800,000 × 30% = $240,000. This also matches taxes payable ($195,000) plus the deferred tax liability created by the temporary difference ($45,000).
Option A: $195,000 is taxes payable, the current tax liability based on taxable income. It is not the total income tax expense reported on the income statement.
Option C: $45,000 is only the deferred tax portion of the expense. It omits the current tax component and cannot stand alone as an income tax expense.
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FAQs About Accounting Profit, Taxable Income, Taxes Payable, and Income Tax Expense
What is the income tax definition for CFA Level I purposes?
For Level I, income tax covers four related measures: accounting profit (pretax income under financial reporting rules), taxable income (income under tax law), taxes payable (the current tax liability), and income tax expense (the total tax cost reported on the income statement).
Is income tax expense the same as taxes payable?
Total tax expense equals current tax expense when there is no net deferred tax charge in profit or loss. An unpaid balance-sheet tax liability can also differ from current tax expense because of payments and prior balances.
How do you find income tax expense on the income statement?
Add current tax expense to the net deferred tax charge recognized in profit or loss. Closing taxes payable instead requires a roll-forward of opening payable, current tax charges, payments, and any other movements. With a constant tax rate, full deferred-tax recognition, and no permanent differences or special adjustments, total expense also equals accounting profit times that rate.
What is deferred income tax?
Deferred income tax is the portion of income tax expense that does not match the current cash tax liability. It arises from temporary differences between accounting profit and taxable income and reverses in future periods.
What is intraperiod income tax allocation?
Intraperiod income tax allocation spreads total income tax expense across continuing operations, discontinued operations, and other comprehensive income, so each component reflects its own tax effect rather than all tax expense sitting under continuing operations.