How to Calculate Tax Provision

by James Collins; Updated September 26, 2017

In the world of finance, terminology is everything. This is also the case for taxation. Taxes are listed as a deduction on the income statement. That is, they are deducted from operating income, along with interest expense, to arrive at net income. Since most companies report income on an annual and quarterly basis, the exact amount of tax to deduct from operating income is still an unknown. For this reason, accountants use an estimate to account for real taxes. This estimate is referred to as the tax provision.

Step 1

Obtain the annual report or internal financial statements. The annual report is usually made available on the company website or by calling the company's investor relations department.

Step 2

Determine the actual cash taxes paid each year. This information is in the notes to the financial statements. It usually has its own section entitled "Taxes." The note will provide the actual dollar amount and percentage of taxes paid each year. You want the percentage.

Step 3

Take an average of the percentages for the past 3 years. For instance, if the percentages for years 1, 2 and 3 are 30, 40 and 50 percent, respectively, the average tax rate is 40 percent.

Step 4

Multiply the average by the estimated net income for the year. For instance, if you think net income for the coming year will be $50,000, then the tax provision is calculated by multiplying .40 by $50,000, which equals $20,000.

About the Author

James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.