Income Tax Expense Research Articles

The Pricing of Realized Tax Benefits from NOL Carryforwards: Effect of Income Statement Presentation

ABSTRACT: We examine the pricing of realized tax benefits from net operating loss (NOL) carryforwards across income statement presentations. During the period 1987 through 1992, firms adopting SFAS No. 96 reported these tax benefits as part of income before extraordinary items (via a reduced provision for income tax expense), while non-adopting firms reported these benefits as extraordinary income items under APB No. 11. We provide evidence that NOL tax benefits were priced rationally when reported as extraordinary income items under APB No. 11; however, NOL tax benefits were overpriced, relative to their one-year-ahead persistence, when included in income before extraordinary items under SFAS No. 96. Our results suggest that the rational pricing of income tax information is affected by its presentation in the income statement, despite the clear reporting of sufficient additional details in the footnotes. Our findings provide support for the Financial Accounting Standards Board’s tentative decision to report income taxes in a separate section of the income statement.

Ann Taylor Stores Corporation - Deferred Taxes

Students are presented with the income-taxes footnote from Ann Taylor Stores Corporation's 2004 Annual Report and are asked to respond to several questions regarding information in the footnote. Questions center around what can be inferred about income-tax expense, deferred-tax expense, and deferred-tax assets and liabilities from the footnote.

The accounting and taxation relationship in Spanish listed firms

The relationship between accounting and fiscal rules has long been controversial. Financial statements conform to accounting principles and methods regardless of tax rules. This independence generates important permanent and temporary differences between accounting and taxable income. The paper analyses the behaviour of listed Spanish firms in this accounting‐taxation relationship 1996‐1998, the extent of introduction of the inter‐period income tax allocation method, and the number and types of permanent and temporary differences reported. Most firms adopt the income tax allocation method, and report the differences, although they do not always specify which transactions provoked them. Among the long list of operations that generate differences, the most frequent are income tax expense, welfare schemes, provision for pensions, monetary correction, accelerated depreciation, or exemption for reinvestment. Although the number and kind of differences vary through time, the variation is not statistically significant. This is the first study analysing such differences for a European Union state.

What Can We Infer about a Firm's Taxable Income from Its Financial Statements?

In this paper I review and describe the income tax disclosures currently required in firms' financial statements. I discuss many of the problems with trying to estimate a firm's actual tax liabilities and taxable income from the income tax expense and disclosures to the financial statements. In doing so, I reveal the conditions under which taxable income may most accurately be estimated from financial statements as well as those conditions which make this task difficult, if not impossible.

How Much Tax Do Large Public Corporations Pay?: Estimating the Effective Tax Rates of the S&P 500

Three recent phenomena - the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administration's proposal to exempt dividends from income - have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980's.

What Can We Infer About a Firm's Taxable Income from its Financial Statements?

In this paper I review and describe the income tax disclosures currently required in firms' financial statements. I discuss many of the problems with trying to estimate a firm's actual tax liabilities and taxable income from the income tax expense and disclosures to the financial statements. In doing so, I reveal the conditions under which taxable income may most accurately be estimated from financial statements as well as those conditions which make this task difficult, if not impossible.

Legal Costs and Accounting Choices: Another Test of the Litigation Hypothesis

This paper provides another test of the litigation hypothesis proposed by Hall and Stammerjohan (1997) and provides evidence that subtle differences in the underlying business environment may be very important in predicting the accounting reaction of management to major events. The litigation hypothesis predicts that firms that are defendants in litigation with potentially large damage awards (major litigation) will attempt to reduce the size of those damage awards by making income‐decreasing accounting choices. The oil firms in the Hall and Stammerjohan study appeared to systematically reduce reported earnings during the litigation periods by under‐reporting new reserves. The fourteen chemical and pharmaceutical firms, involved in fifteen litigation events, examined by this study produce a very different result. The chemical and pharmaceutical firms faced a different business environment during their litigation periods and appear to have made income‐increasing accounting choices. These firms appear to have been able to perpetuate earnings growth without corresponding sales revenue growth during the litigation periods through unexpected reversals in deferred income tax expense.

How Much Tax Do Large Public Corporations Pay? Estimating the Effective Tax Rates of the S&P 500

Three recent phenomena - the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administration's proposal to exempt dividends from income - have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980's.

The 1993 Tax Rate Increase and Deferred Tax Adjustments: A Test of Functional Fixation

This paper uses a sample of 158 deferred tax adjustments resulting from the Omnibus Budget Reconciliation Act of 1993 (OBRA) to explore the magnitude and nature of analysts' and investors' functional fixation on reported accounting numbers. The 1993 OBRA, passed on August 10 of 1993, included a provision that raised the corporate tax rate from 34% to 35%. GAAP requires companies to adjust their deferred tax assets and liabilities to recognize the income effects of tax changes in the period of the tax change (SFAS No. 109 [1992]). In this case, the effects of the tax rate increase on deferred taxes would be included in the income tax expense component of 1993 third-quarter earnings.1

How to allocate state income taxes between U.S.‐ and foreign‐source income

AbstractDue to the reductions in federal income tax rates, many corporations find themselves with excess foreign tax credits. In order to use the foreign tax credits, corporations attempt to maximize foreign‐source income and to minimize expenses allocated to foreign‐source income. Allocation of expenses between U.S.‐ and foreign‐source income is governed by Treas. Reg. Sections 1.861‐;8 and 1.861.8T. The allocation methods for state income tax expense are complex. Each method results in a different amount of state income taxes being allocated to foreign‐source income. This article discusses the intricacies of three allocation methods, which should be considered when selecting a method.

Political costs and an intraperiod accounting choice for export tax credits

This study examines the effects of political and debt contracting costs on an intraperiod accounting choice. Export tax credits that New Zealand companies receive may be credited to sales ot to income tax expense. Compared to the credit to sales method, the tax reduction method reduces a company's reported tax rate and interest coverage ratio, both of which could have adverse economic consequences. The results indicate the credit to sales method is preferred by large companies that attract political scrutiny because of their low tax rates. The level of a firm's interest coverage is also related to that accounting choice.

A Note on Solving the Balancing Problem

One of the computational nuisances encountered by students and practitioners when preparing financial projections is the balancing problem, which results from the fact that projected total assets rarely equal projected total liabilities and equity. The imbalance is usually corrected by increasing projected assets or liabilities and equity by a This would seem like a simple enough problem except that the plug figure usually represents either projected excess funds or the need for additional financing, either of which can affect the projected income statement. For example, if projected total assets exceed total liabilities and equity, the plug figure represents the need for additional financing. If treated as debt, interest expense on the income statement must be increased. This reduces taxable income which, in turn, reduces income tax expense and net income. The reduction in net income reduces retained earnings on the balance sheet, thereby causing the balance sheet to again be out-of-balance. The plug figure must be increased to cover the effect of the after-tax interest expense. But once it is increased, interest expense must again be increased (i.e., interest on interest) and the process is repeated. The result is a seemingly never-ending circle of computations, at least until the amount of the imbalance is insignificant. When projected total liabilities and equity exceed total assets, the required plug figure represents excess funds, which could be used to reduce existing debt or simply held in the form of interest-bearing securities. In either case, the income statement would be affected by the additional income. This increases taxable income, income taxes, net income, and finally retained earnings on the balance sheet, thus again invalidating the original plug figure. The balance sheet does not balance and the circle of computations begins again. The foregoing problems of simultaneity can be further complicated by other projection interrelationships. For example, accrued income taxes on the balance sheet is usually projected as a function of income tax expense and would therefore be affected by the tax effects of the plug figure. Similarly, common dividends might be projected as a percentage of net income. Since the plug figure affects net income, common dividends in this case will also be affected. Similar comments can be made regarding bonuses and profit sharing. The author appreciates David E. Jensen's comments on the first draft and subsequent suggestions from Robert A. Taggart and two anonymous referees.

LIFO Layer Liquidations: Some Empirical Evidence

The LIFO inventory valuation method has received a great deal of attention as a means of postponing taxes. At the same time the tax consequences of a LIFO inventory liquidation have been virtually ignored. This research indicates that LIFO layer liquidations do occur and can, therefore, cause cash flow problems for corporations in the form of higher federal income tax payments. A hypothesis that LIFO layer liquidations is specific to certain cyclical industries was tested and affirmed. A survey indicated that two factors, cost of capital and income tax expense, were the more critical in the LIFO layer liquidation decision.

Analyzing Effective Corporate Tax Rates

* ASR No. 149 requires reporting companies to publish a reconciliation between their reported income tax expense and an amount equal to the statutory federal tax rate of 48 per cent multiplied by income before taxes. It defines the effective tax rate for this purpose as income tax expense divided by book income before taxes. The author questions whether income tax expense is the best measure of a firm's tax burden, based as it is on book income, which is affected by the choice of generally accepted accounting principles. Taxes currently payable, on the other hand, are based on taxable income and relatively unaffected by alternative accounting principles. Using income taxes currently payable divided by estimated taxable income as the definition of the effective tax rate, the author develops a framework for reconciling effective and statutory rates. He also discusses the problems that certain items-taxes on nonrecurring income, taxes on earnings of unconsolidated subsidiaries, deferred tax provisions that may not reverse and investment tax credits-may create for the interpretation of effective rates. Since a firm's cash flow and earnings depend critically on its effective tax rate, analysis of a firm's past effective rate can lead to a better understanding of the firm's future cash flow and earnings. The kind of analysis described by the author can also be useful in determining whether apparent differences in firms' effective tax rates reflect genuine competitive differences or mere differences in accounting. >

Income Tax—Expenses and Emoluments

Income Tax—Expenses and Emoluments