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How Are Taxes Provided For In Interim Periods?

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The income tax provision includes current and deferred taxes (e.g., total tax expense for a nine-month period is shown in the third quarter based on nine months’ income). The tax expense for the three-month period based on three months revenue may also be presented (e.g., third quarter tax expense based on only the third quarter). In computing tax expense, use the estimated annual effective tax rate based on income from continuing operations. If a reliable estimate is not feasible, the actual year-to-date effective tax rate may be used.

At the end of each interim period, a revision of the effective tax rate may be needed using the best estimates of the annual effective tax rate. The projected tax rate includes adjustment for net deferred credits. Adjustments should be considered in deriving the maximum tax benefit for year-to-date figures.

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The estimated effective tax rate should incorporate all available tax credits (e.g., foreign tax credit). A change in taxes arising from a new tax law is immediately reflected in the interim period it occurs.

Income statement items after income from continuing operations (e.g., income from discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle) should be presented net of taxes. The tax effect on these unusual line items should be reflected only in the interim period when they actually occur. Prior period adjustments in the retained earnings statement are also shown net of tax.

The tax implication of an interim loss is recognized only when realization of the tax benefit is assured beyond reasonable doubt. If a loss is expected for the remainder of the year, and carry-back is not possible, the tax benefits typically should not be recognized.

The tax benefit of a previous year operating loss carry-forward is recognized as an extraordinary item in each interim period to the extent that income is available to offset the loss carry-forward.

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