Nonrecurring Income Taxes

71 Pages Posted: 23 Jan 2016 Last revised: 29 Jun 2020

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Colin Koutney

George Mason University - School of Business; George Mason University

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Date Written: June 2020

Abstract

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

Donelson, Dain C. and Koutney, Colin and Mills, Lillian F., Nonrecurring Income Taxes (June 2020). Available at SSRN: https://ssrn.com/abstract=2720464 or http://dx.doi.org/10.2139/ssrn.2720464

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Colin Koutney (Contact Author)

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

George Mason University ( email )

Fairfax, VA 22030
United States

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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