What is Estimated annual effective tax rate?
In short
Interim income tax expense is figured by applying the estimated annual effective tax rate to year-to-date ordinary pretax income, then subtracting the tax already recognized in earlier interim periods.
Key takeaways
- The estimate is updated each quarter, with the effect of changes recognized in the current quarter.
- Unusual or infrequent items and discontinued operations are taxed separately in the period they occur.
- The effect of a new tax law is recognized in the interim period that includes the enactment date.
Example
Pretax income of $600,000 for the first six months at an estimated 24% rate, with $70,000 recognized in the first quarter: second-quarter tax expense is $144,000 − $70,000 = $74,000.
Where it's tested
FAR: Income Taxes (Deferred Tax Accounting) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company's statutory tax rate is 21%, but its effective tax rate is 18%. Which item would explain this difference?