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Taxes related to an employee share-based payment award within the scope of Topic 718 when the deduction for the award for tax purposes does not equal the cumulative compensation costs of the award recognized for financial reporting purposes, significant unusual or infrequently occurring items that will be reported separately or items that will be reported net of their related tax effect shall be excluded from the estimated annual effective tax rate calculation.
Estimated Annual ETR (excluding restructuring charge) |
Estimated Annual ETR (including restructuring charge) |
|||
Pre-tax book income (before restructuring) |
$165.0 |
$165.0 |
||
Less: Restructuring expense |
(50.0) |
|||
Projected pre-tax book income (after restructuring) |
$165.0 |
$115.0 |
||
Add back: Nondeductible meals & entertainment |
25.0 |
25.0 |
||
Projected pre-tax income adjusted for permanent items |
$190.0 |
$140.0 |
||
Statutory rate |
25% |
25% |
||
Projected tax expense on pre-tax income plus permanent items |
$47.5 |
$35.0 |
||
Estimated Annual ETR |
28.8% |
30.4% |
||
Tax benefit from restructuring ($50.0 x 25%) |
(12.5) |
|||
Projected tax expense for the year |
$35.0 |
$35.0 |
||
Q1 |
Q2 |
Q3 |
Q4 |
|
Pre-tax book income (before restructuring) |
$50.0 |
$30.0 |
$60.0 |
$25.0 |
Less: Restructuring expense in Q2 |
(50.0) |
|||
Pre-tax book income |
$50.0 |
$(20.0) |
$60.0 |
$25.0 |
Quarterly YTD tax expense if restructuring impairment is considered unusual or infrequent and the tax effects are reported entirely in Q2
|
$14.4
|
$(3.9)
|
$17.3
|
$7.2
|
Reported quarterly YTD ETR (discrete)
|
28.8% |
19.5% |
28.8% |
28.8% |
Reported year-to-date ETR (discrete)
|
28.8% |
35.0% |
30.1% |
30.4% |
Quarterly YTD tax expense if restructuring impairment is considered ordinary and the forecasted ETR is used for the remainder of the year)
|
$14.4
|
$(5.3)
|
$18.3
|
$7.6
|
Reported quarterly YTD effective rate (spread)
|
28.8% |
26.4% |
30.4% |
30.4% |
Reported year-to-date ETR (spread)
|
28.8% |
30.4% |
30.4% |
30.4% |
Certain investment tax credits may be excluded from the estimated annual effective tax rate. If an entity includes allowable investment tax credits as part of its provision for income taxes over the productive life of acquired property and not entirely in the year the property is placed in service, amortization of deferred investment tax credits need not be taken into account in estimating the annual effective tax rate; however, if the investment tax credits are taken into account in the estimated annual effective tax rate, the amount taken into account shall be the amount of amortization that is anticipated to be included in income in the current year (see ASC 740-10-25-46 and 740-10-45-28).
The effects of new tax legislation shall not be recognized prior to enactment. The tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be recorded after the effective dates prescribed in the statutes and reflected in the computation of the annual effective tax rate beginning in the first interim period that includes the enactment date of the new legislation. The effect of a change in tax laws or rates on a deferred tax liability or asset shall not be apportioned among interim periods through an adjustment of the annual effective tax rate.
The tax effect of a change in tax laws or rates on taxes payable or refundable for a prior year shall be recognized as of the enactment date of the change as tax expense (benefit) for the current year. See Example 6 (paragraph 740-270-55-44) for illustrations of accounting for changes caused by new tax legislation.
The tax benefit of an operating loss carryforward from prior years shall be included in the effective tax rate computation if the tax benefit is expected to be realized as a result of ordinary income in the current year. Otherwise, the tax benefit shall be recognized in the manner described in paragraph 740-270-45-4 in each interim period to the extent that income in the period and for the year to date is available to offset the operating loss carryforward or, in the case of a change in judgment about realizability of the related deferred tax asset in future years, the effect shall be recognized in the interim period in which the change occurs.
Paragraph 740-20-45-3 requires that the manner of reporting the tax benefit of an operating loss carryforward recognized in a subsequent year generally is determined by the source of the income in that year and not by the source of the operating loss carryforward or the source of expected future income that will result in realization of a deferred tax asset for the operating loss carryforward. The tax benefit is allocated first to reduce tax expense from continuing operations to zero with any excess allocated to the other source(s) of income that provides the means of realization, for example, discontinued operations, other comprehensive income, and so forth. That requirement also pertains to reporting the tax benefit of an operating loss carryforward in interim periods.
Estimated full-year pre-tax income |
$200,000 |
Tax expense: |
|
Tax on current-year income at 33.5% |
67,000 |
Reversal of valuation allowance related to current year income |
(67,000) |
Total current tax |
$— |
Estimated ETR at end of second quarter [$0 / $200,000] |
0.0% |
Reversal of valuation allowance based on future years’ income ($1,005,000 less $67,000 current year portion) |
(938,000) |
Total tax provision (benefit) |
(938,000) |
Net income |
$1,138,000 |
Tax (or benefit) |
|||||||
Reporting period |
Quarterly income/ (loss) |
Year-to-date income/ (loss) |
Est. annual effective tax rate |
Year-to-date |
Less previously provided |
Reporting period amount |
|
ETR |
Discrete |
||||||
First quarter |
$ — |
$ — |
0.0% |
$ — |
$ — |
$ — |
$ — |
Second quarter |
50,000 |
50,000 |
0.0% |
— |
$(938,000) |
— |
(938,000) |
Third quarter |
50,000 |
100,000 |
0.0% |
— |
(938,000) |
(938,000) |
— |
Fourth quarter |
100,000 |
200,000 |
0.0% |
— |
(938,000) |
(938,000) |
— |
Fiscal year |
$200,000 |
$(938,000) |
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