Is income tax an operating expense?

Income tax is a non-operating expense because it’s based on profit, not business activity. It’s recorded below operating income and is not deductible as a business expense on the company’s own tax return.

What is income tax in accounting?

Income tax represents the amount a business owes to federal, state, or local governments based on its taxable income. It’s calculated after accounting for all revenue, operating expenses, and non-operating items. Because it depends on profitability rather than business activity, it’s excluded from operating costs, which reflect ongoing operational performance.

How to categorize income tax

Record as a Non-Operating Expense on the income statement.
Use an “Income Tax Expense” account separate from “Operating Expenses.”
Include federal, state, and local income taxes owed by the business.
Do not include payroll taxes, property taxes, or sales taxes (those are operating expenses.)
Record deferred tax liabilities or assets on the balance sheet if income is recognized in different periods for accounting vs. tax purposes.

Examples of income tax expenses

Federal corporate income tax.
State or local business income tax.
Estimated tax payments made during the year.
Deferred income tax adjustments.
Franchise taxes based on net income.

Tax implications for income tax expenses

Business income tax payments are not deductible on the business’s own income tax return; they represent the company’s tax liability, not an expense that reduces taxable income.
Other business-related taxes (e.g., payroll tax, property tax, sales tax) are deductible as operating expenses.
For pass-through entities (sole proprietorships, partnerships, S-corps), income tax is paid by the owners personally, not by the business.
Track estimated and final tax payments separately from other expenses for accurate financial reporting.
Include all income tax activity in the Non-Operating section of your financial statements