Change in Income Tax Payable
Period-to-Period Movement in Current Income Tax Obligations
Change in Income Tax Payable is the net increase or decrease in the company's current income tax liability during the reporting period. This line appears in the operating activities section of the indirect-method cash flow statement. An increase adds to operating cash flow (tax expense recognized but cash payment delayed), while a decrease subtracts (settling prior tax liabilities with cash).
What It Really Means
Income tax payable is the current tax the company owes based on taxable profit for the year. Companies often make estimated payments throughout the year, but the final amount is settled later.
When the liability grows, you've recorded more tax expense than you've paid in cash—keeping money longer and boosting operating cash flow. When it falls, you're paying more cash than the current expense—reducing OCF.
A Clear Example
Company estimates quarterly taxes and pays $20M during the year, but final return shows $25M total owed.
- Income Tax Payable rises by $5M
- Cash flow this year: +$5M Change in Income Tax Payable (add-back)
- Next year: Pay the $5M balance
- Next year cash flow: -$5M Change in Income Tax Payable
This year gets a cash timing benefit; next year feels the outflow.
Common Drivers
- Estimated payments vs. final tax liability
- Profit growth (higher taxes accruing)
- Tax credits or deductions applied late
- Prior year adjustments or audits
- Installment schedule timing
Fast-growing profitable firms often show increases.
How It Fits in Cash Flow
Indirect method operating section:
- Net Income (after tax expense)
- + Increase in Income Tax Payable (or − Decrease)
- = Closer to actual cash from operations
It's a working capital adjustment for tax payment timing.
What a Change Tells You
- Rising → cash conservation on taxes (OCF positive)
- Falling → settling past taxes (cash outflow)
- Link to profitability and effective tax rate
- Conservative vs. aggressive estimated payments
- Future cash tax implications
Compare to current tax expense for insight into payment aggressiveness.
Key Takeaways
Change in Income Tax Payable adjusts for difference between tax expense and cash payments.
Increase adds to OCF (accrue now, pay later).
Decrease subtracts (paying prior liability).
Driven by estimated payments vs. final liability.
Part of working capital changes.
Growth often accompanies rising profits.
Change in Income Tax Payable
Period-to-Period Movement in Current Income Tax Obligations
Change in Income Tax Payable is the net increase or decrease in the company's current income tax liability during the reporting period. This line appears in the operating activities section of the indirect-method cash flow statement. An increase adds to operating cash flow (tax expense recognized but cash payment delayed), while a decrease subtracts (settling prior tax liabilities with cash).
Table of Contents
What It Really Means
Income tax payable is the current tax the company owes based on taxable profit for the year. Companies often make estimated payments throughout the year, but the final amount is settled later.
When the liability grows, you've recorded more tax expense than you've paid in cash—keeping money longer and boosting operating cash flow. When it falls, you're paying more cash than the current expense—reducing OCF.
A Clear Example
Company estimates quarterly taxes and pays $20M during the year, but final return shows $25M total owed.
- Income Tax Payable rises by $5M
- Cash flow this year: +$5M Change in Income Tax Payable (add-back)
- Next year: Pay the $5M balance
- Next year cash flow: -$5M Change in Income Tax Payable
This year gets a cash timing benefit; next year feels the outflow.
Common Drivers
- Estimated payments vs. final tax liability
- Profit growth (higher taxes accruing)
- Tax credits or deductions applied late
- Prior year adjustments or audits
- Installment schedule timing
Fast-growing profitable firms often show increases.
How It Fits in Cash Flow
Indirect method operating section:
- Net Income (after tax expense)
- + Increase in Income Tax Payable (or − Decrease)
- = Closer to actual cash from operations
It's a working capital adjustment for tax payment timing.
What a Change Tells You
- Rising → cash conservation on taxes (OCF positive)
- Falling → settling past taxes (cash outflow)
- Link to profitability and effective tax rate
- Conservative vs. aggressive estimated payments
- Future cash tax implications
Compare to current tax expense for insight into payment aggressiveness.
Key Takeaways
Change in Income Tax Payable adjusts for difference between tax expense and cash payments.
Increase adds to OCF (accrue now, pay later).
Decrease subtracts (paying prior liability).
Driven by estimated payments vs. final liability.
Part of working capital changes.
Growth often accompanies rising profits.
Related Terms
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