What Are Income Taxes?

If there’s anything that everyone of us has experienced as Americans, it is income taxes.  Today we will touch very briefly on income taxes and how they are accounted for.  The question that most accountants find themselves asking is, “are income taxes an expense, a loss, or a revenue contra, or do they have their own unique status”?  Most accountants would probably think to classify income taxes as expenses.  (But how, by any stretch of the imagination, do they produce revenues?) Since we learned yesterday that expenses need to produce some sort of revenue to be counted as such.  Some accountants might naturally classify income taxes as a pure loss but that doesn’t account for the fact that the government makes any contribution whatsoever to our well-being. (Still questionable these days lol).  Other accountants assert that the government is a sort of partner in every profit making enterprise and that the income tax claimed by government is, thus, merely its share or division of the earnings.  In some cases income taxes take on the appearance of revenue contra, like when, for example, we make sales of war material to the government and then the government claims a refund in the form income taxes on the profit from the sales.  Given all those views, it becomes quite a problem to choose a single one, so we are going to propose simply that income taxes be shown as a separately reported subtraction from the total revenues of the period.  That is a simple rule accountants can follow if it is unclear how to claim income taxes.

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