Financial Education

The provision for income taxes is the tax the company will pay (at some time – some will be deferred) on the income before taxes. NTT takes the fairly unusual step of separating the deferrals directly on the income statement. Investors can estimate the company’s average income tax rate by dividing the provision for income taxes by the income before taxes, as shown below.

AT&T’s tax rate is significantly less in 2005 than in previous years. Turning to the notes to the financial statements, we learn that:

In December 2005, we reached an agreement with the IRS to settle certain claims, principally related to the utilization of capital losses and tax credits for years 1997-1999. Included in the settlement was relief from previous assessments and agreement on multiple items challenged by the IRS in the course of routine audits. As we had previously paid the assessments in full and filed refund claims with the IRS, the settlement resulted in our recognition of approximately $902 of reduced income tax expense in 2005 and a corresponding increase in net income.

Without this one-time settlement, taxes would have been 1,834 and the tax rate would have been 32.1%, in line with the prior two years. This adjusted rate would be more useful to investors trying to estimate future tax rates.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis

See also:

Pre-tax income

Deferred Tax Liabilities

Tax Considerations in Investment Management

The Income Statement: Operating versus Non-Operating Components

Comprehensive Income