For entities with a calendar year-end, it’s that time of year – time to calculate the second quarter income tax provision. Income tax expense for interim periods is based on an estimated annual effective income tax rate multiplied by the year-to-date ordinary pretax book income. To get your interim provision right the first time, remember the following:
- Ordinary pretax book income does not include significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect. Such items include, but are not limited to, discontinued operations or the cumulative effect of a change in accounting principle.
- Certain items are not included in the estimated annual effective tax rate. Instead, these items are allocated 100% to the quarter in which they occur. Such items include, but are not limited to, certain releases of a valuation allowance, certain changes in a liability for uncertain tax positions, the impact of a change in tax law and the true-up of the tax provision from the prior year.
- Just like the annual tax provision, the interim tax provision is based on enacted tax law. As of June 30, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the Extenders Bill) has not been signed into law by the President. As such, it is not appropriate to include in the second quarter provision any benefit for Research Credits generated during 2010.
- Jurisdictions in which a company is unable to recognize a tax benefit for losses (i.e. a full valuation allowance has been recorded) are excluded from the estimated annual effective income tax rate calculation.