How to Compute Cash Taxes

In finance, there's a difference between cash taxes actually paid and the provision for taxes. Since taxes are paid out after the release of the annual report, most companies are not able to report the actual amount of cash taxes paid to the Internal Revenue Service, however, with a little work you can compute the actual amount of cash taxes paid out by using the company's financial statements. Specifically, you will need the income statement and the balance sheet for both the current year as well as the previous year.

Step 1

Obtain the company's annual report. Typically, companies provide a copy of the annual report on the company website. You can also obtain one by contacting the Investor Relations Department and requesting that a copy be sent to you directly.

Step 2

Identify the company's income tax provision, which can be found at the bottom of the income statement.

Step 3

Add the year-to-year increase in the the deferred income tax liability to the provision. This amount can be found on the company's balance sheet. A deferred tax liability occurs when a company pays less in cash taxes than it provisioned on the income statement which results in a source of cash for the company and must be added to the income tax provision to arrive at cash taxes.

Step 4

Compute cash taxes. Deduct taxes paid -- for example, interest income -- or add back taxes sheltered by debt -- for example, interest expense. For example, if a company had $10 million in interest income with a 30 percent tax rate, subtract 3 million to the amount computed in the step above. If the company had $10 million in interest expense, add $3 million to the amount computed in the step above.

references