Given that many income statements have several major sections (continuing operations, discontinued operations, and extraordinary items), a decision must be made about where to report income tax expense. GAAP takes the reasonable position that taxes should be allocated to each major section. Consider Exhibit below ; one item listed is provision for income taxes. This is not Hahn’s total income tax expense, however. It is the income tax associated with continuing operations. The tax effects associated with discontinued operations are included in the calculation of those reported losses. This format shows discontinued operations net of tax.
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Note that discontinued operations generated a loss and that the tax effect is labeled a tax benefit. Losses yield tax benefits because they lower the taxes a firm must pay.
Consider a simple example. In 2001, Crimp Corporation earned, before taxes, a profit of $10,000 on continuing operations. It also incurred a $2,000 loss on discontinued operations. Assume a tax rate of 30%. Had the $2,000 loss not been incurred, Crimp’s total tax expense would have been $3,000:
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