Determining the Provision for Income Tax: A Guide to Calculation

A tax provision is the estimated amount of income tax that a company is required to pay to the IRS in the current year. It is just one type of provision that corporate finance departments set aside to cover future expenses. This article will provide an overview of tax provisions, including how to calculate them, the challenges that companies face when calculating tax provisions, and steps to improve the process.

Current and Deferred Income Tax Expenses

The calculation of a company’s tax provision has two parts: current income tax expense and deferred income tax expense. To calculate the current income tax expense, a company must start with its net income and then account for permanent and temporary differences between the GAAP and income tax rules, apply credits and NOL, and multiply the taxable income by the current tax rate. The deferred income tax, on the other hand, is a liability that a company has on its balance sheet but is not yet due for payment. It focuses on the deferred effects of income, expenses, NOL, and tax credits and accounts for these items as assets or liabilities on the balance sheet.

Challenges of Tax Provision

Calculation Calculating tax provisions is a complex and challenging task that companies face.

The following are common challenges:

  • Out-of-sync income reporting
  • Difficulty in gathering and integrating the right data
  • Handling a large volume of data
  • Keeping up with tax law changes
  • Reliance on manual calculation processes

Improving Tax Provision Calculation

Process To improve the tax provision calculation process, companies can take the following steps:

  • Harness and analyze data
  • Consult tax provision checklists
  • Review compliance
  • Opt for automation

Benefits of Tax Provision Software

Tax provision software can help companies streamline their tax provisioning calculation. By automating processes, reducing errors, and improving accuracy and speed. It provides the tools to respond to regulatory changes and ensures compliance with tax laws.


Tax provisions are an important aspect of a company’s financials, and an accurate calculation is critical for the success of a business. By understanding the calculation process, overcoming common challenges, and implementing effective solutions, companies can ensure that their tax provisions are accurate, compliant, and delivered in a timely manner.

Disclaimer: This is not legal advice, consult an attorney for legal advice or contact us.

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