Income Taxes in Interim Financial Statements

In order to determine the income tax provision for interim periods, it is necessary to estimate the effective tax rate for the entire current fiscal year at the end of each interim period. This effective tax rate is then applied to interim income to calculate the interim income tax expense (or benefit).

In determining the effective tax rate, we need to consider permanent tax differences, such as percentage of depletion, nontaxable income, and non-taxable expenses. We also need to exclude the tax effect of non-ordinary items of income or loss, such as extraordinary items, discontinued operations, and the cumulative effect of changes in accounting principles.

The process is repeated for the third and fourth quarters, and any changes in the estimated full year tax rate are reflected in the tax provision for the second quarter, without the need for retroactive revision. If the operating result for the quarter results in a loss and the realization of a tax benefit is reasonably assured, a tax benefit may be recognized. If the tax benefit is not reasonably assured, it is not realized.

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