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Subject:  Why pay corporate taxes with deferral left? Date:  7/20/2000  10:57 AM
Author:  dripton Number:  37756 of 130845

Let's say you're a Fortune 500 corporation, and you've lost money for the last several years. Losing money is bad, but the upside of losing money is that you don't have to pay corporate income tax during those years. And you even get a tax deferral to carry forward into years when you start making money again.

Let's say that after all those lousy years, with a large tax deferral built up, you finally have a great year. You expect that this year's profits will more than offset all those past losses, and the cumulative tax deferrals that they provided. You estimate that the tax deferral will be used up in Q3 or Q4, and you'll have to start paying corporate income tax again at that point.

Is there any reason why a company in this situation would be required (by tax law / IRS regulations / Generally Accepted Accounting Principles) to start reporting and setting aside (at least on paper) money for taxes earlier in the year, before the tax deferral is actually used up? Or can they keep their zero tax rate until all of the deferral is used up, and only then start accounting for income tax in earnings calculations?

(This is not a hypothetical question. AMD just set aside 20% for taxes in their Q2 earnings report, dropping earnings from $1.51 to $1.21, even though they haven't used up their tax deferral. There's some debate on the AMD board as to whether AMD did this because they had to, or whether they chose to do so to smooth out their quarter-to-quarter earnings. Unfortunately, we don't have any tax gurus over there.)


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