Nonrecurring Income Taxes
71 Pages Posted: 23 Jan 2016 Last revised: 29 Jun 2020
Date Written: June 2020
Nonrecurring income taxes are transitory items that exclusively affect earnings through tax expense. We conduct the first in-depth examination of nonrecurring income taxes to determine whether they are primarily attributable to economic events or managerial opportunism. We find nonrecurring income taxes have little economic predictive power for future earnings, are not associated with meeting or beating future analyst earnings forecasts, and are not associated with future tax expense restatements. We also provide descriptive information about the tax events that frequently result in nonrecurring income taxes and find the most common events are tax audit resolutions, valuation allowance changes, tax law changes, mergers and repatriations. Overall, our findings suggest that nonrecurring income taxes are driven by economic events rather than managerial opportunism. We recommend researchers consider whether the inclusion of nonrecurring income taxes (or specific types of nonrecurring taxes) is appropriate when using ETR levels or volatility as measures of tax risk and avoidance or aggressiveness.
Keywords: Nonrecurring Income Taxes, Accounting for Income Taxes, ASC 740
JEL Classification: H25, M41
Suggested Citation: Suggested Citation