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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.)

Thanks.
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<<Let's say you're a Fortune 500 corporation, and you've lost money for the last several years.>>

We generally don't get into corporation tax issues here...especially COMPLICATED corporation tax and accounting issues. I'm not qualified from either a tax or financial statement standpoint to really provide any information or insight. But I'll do the best that I can with your question.

<< 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.>>

Right...in the most simple of terms...it's called a net operating loss. And individuals also have a similar NOL carryover/back provision in the tax code.

<<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.>>

Ok...

<< 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.>>

Ok...

<<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?>>

When you are talking about reporting for a public company, you are talking about GAAP. And I don't know GAAP. Perhaps some CPA with oodles of financial statement experience will stop by and handle your question. But for me...it's WAY over my head. Sorry. As far as the IRS is concerned, as long as the taxes are paid (and prepaid) appropriately, Uncle Sammy could care less how those taxes are reported on the financial statements. That reporting is up to the CPAs and the SEC.

<< 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?>>

Again, you're just over my head from a financial reporting standpoint.

<<(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.)>>

From purely an income tax standpoint, it's immaterial. As far as GAAP and a financial accounting standpoint, I have no idea.

Again...sorry...
TMF Taxes
Roy

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From purely an income tax standpoint, it's immaterial. As far as GAAP and a financial accounting standpoint, I have no idea. Again...sorry...

Thanks, Roy. No need to apologize for not knowing everything about everything. :->
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D --

I'm not an accountant either, but here are a few thoughts.

GAAP for income taxes is governed by FAS 109. This tells you basically whether you have a current or deferred tax asset or tax liability. AMD's financial statements should have a lengthy footnote talking about the FAS 109 calculations they have made.

Tax assets and liabilities can be domestic or international. Just because AMD has something in its 'tax account' it hasn't used yet doesn't mean that it's usable against the income it is currently recognizing... and because of all the differences in tax rules around the world, it's very likely that AMD couldn't 'zero out' its tax assets before accruing a liability.

The tax laws are based on annual accounting concepts. I believe that GAAP is much the same... So for example, for tax purposes, if you expect to have income for the year, you will generally make estimated tax payments even if you have losses early in the year and profits late in the year (there are exceptions to this).

There's also the possibility that some of the 'tax assets' are offsettable against only certain kinds of income. For instance, if AMD had some capital losses on its portfolio investments (e.g., stock investments in other computer companies), those capital losses can only be used to offset capital gains AMD might have on its other portfolio investments... i.e., those amounts aren't "NOLs", but capital losses.

Hope this helps!

Fool on!
Barbara
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