What is a tax provision?

A tax provision is the estimated income tax expense recorded in financial statements, including current tax liability and deferred tax assets or liabilities arising from temporary differences between book and tax treatment. For professional service firms using accrual accounting, tax provisions ensure financial statements reflect tax obligations accurately.

Key characteristics

• Estimated tax expense

• Recorded in financial statements

• Includes current and deferred

• Based on book income

• Adjusted for permanent differences

• Complex for larger firms

Why it matters for professional service firms

Tax provisions ensure financial statements reflect tax obligations. Without provisions, pre-tax income overstates available profit. Professional service firms should record tax provisions, even if estimated, to present accurate financial results.

Real-world example

Sarah's firm had $280,000 book income. Tax provision calculation: estimated federal tax $58,800 (21% C corp rate), estimated state tax $14,000 (5% rate), total provision $72,800. Journal entry: debit income tax expense $72,800, credit current income tax payable $72,800—net income after tax: $207,200. Financial statements showed true after-tax profitability.