Intraperiod Tax Allocation
Intraperiod tax allocation is an accounting method that allocates a company’s total income tax expense for a particular period to different parts of the income statement. The objective of intraperiod tax allocation is to associate tax effects with the specific items that directly affect them.
According to both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), income tax expense should be associated with each of the following sections of the income statement:
- Continuing Operations: This is the main part of a company’s business, and most of the income tax expense is typically associated with this part of the income statement.
- Discontinued Operations: If a company has disposed of, or plans to dispose of, a component of its business, the income or loss from these discontinued operations is reported separately on the income statement, net of tax.
- Extraordinary Items: Under U.S. GAAP, until 2015, income or loss from extraordinary items (both unusual and infrequent events) were reported separately on the income statement, net of tax. However, this classification has been eliminated in recent updates and is no longer used.
- Other Comprehensive Income: Certain items that are not part of net income but instead are included in other comprehensive income, such as unrealized gains or losses on certain types of investments, are also reported net of tax.
By associating income tax expense with specific parts of the income statement, intraperiod tax allocation helps provide a clearer picture of a company’s effective tax rate on different types of income.
Example of Intraperiod Tax Allocation
Let’s consider a hypothetical company’s income statement for a given year.
Assume the following pre-tax amounts for the company:
- Income from continuing operations: $100,000
- Gain from discontinued operations: $20,000
- Other comprehensive income: $10,000
Assume the tax rate is 25%.
With intraperiod tax allocation, the income tax expense would be calculated separately for each part:
- Tax on income from continuing operations = $100,000 * 25% = $25,000
- Tax on gain from discontinued operations = $20,000 * 25% = $5,000
- Tax on other comprehensive income = $10,000 * 25% = $2,500
The company’s income statement would then present the following after-tax amounts:
- Income from continuing operations, net of tax: $100,000 – $25,000 = $75,000
- Gain from discontinued operations, net of tax: $20,000 – $5,000 = $15,000
And the other comprehensive income section would present:
- Other comprehensive income, net of tax: $10,000 – $2,500 = $7,500
By allocating the total tax expense in this manner, the company clearly presents the tax impact on different components of its income statement. This provides users of the financial statements with a more nuanced understanding of the company’s financial performance and its tax obligations.
