A prepaid income tax is an asset, recorded on the balance sheet of an entity as a prepaid item, representing taxes that have been already paid in advance (i.e., it is not incurred). Differences between income taxes paid and the actual tax amounts payable necessitate adjustments to the prepaid tax accounts. Such differences come up primarily through the use of accelerated methods of depreciation for tax.

A prepaid income tax is also called a deferred income tax asset, though technically the two concepts differ in terms of time span. More specifically, a prepaid income tax corresponds to occurrence within one year. To the contrary, a deferred income tax asset can span a period beyond one year. In general cases, prepaid income taxes result from misplaced assumptions leading to overestimation of tax for a particular financial year. If the estimated amount of tax correspond to more than a year, a deferred income tax asset is recorded to account for the overall amount corresponding to a current year and future periods.