Conceptual Nature of the Corporate Income Tax

By Nurnberg, Hugo | Accounting Historians Journal, December 2009 | Go to article overview

Conceptual Nature of the Corporate Income Tax


Nurnberg, Hugo, Accounting Historians Journal


Abstract: This paper examines a long-standing controversy about the conceptual nature of the corporate income tax: whether it is an expense, a loss, a distribution of income, or some anomalous item. That controversy reflects in part different theories of the accounting entity.

Despite several authoritative pronouncements stating or implying that the tax is an expense, and despite an extensive discussion in the academic and professional literature, the controversy has never been fully resolved. Additionally, the tax is not characterized as an expense in corporate financial reports. The FASB's conceptual framework does not resolve this controversy, nor does the impending joint FASB-IASB revised conceptual framework.

Within the context of a coalesced (or fused) proprietary-entity theory of the accounting entity, this paper leads to the unsurprising conclusion that the corporate income tax is an expense, albeit an expense with some remarkable characteristics. Additionally, this paper shows how the conceptual nature of the corporate income tax impacts its income statement and cash flow statement reporting, and how a better understanding of this conceptual controversy might preclude fruitless controversies over other accounting issues currently troubling accountants and accounting standard setters.

INTRODUCTION

Most academic and practicing accountants of a certain age are familiar with the long-standing controversy over the financial accounting for corporate income taxes. This controversy centered on whether to ignore deferred income taxes under the flow-through method or recognize them under some version of interperiod income tax allocation. It was largely resolved in the U.S. [ARB-23, 1944; APB-11, 1967; SFAS-96, 1987b; SFAS-109, 1992] and internationally [IAS-12, 1998; IAS-12 (Revised), 2006] in favor of comprehensive interperiod income tax allocation under the asset-liability method. Less well known and understood, however, is an even older controversy about the conceptual nature of the corporate income tax: whether the tax is an expense, a loss, a distribution of income, or some anomalous item, and how its conceptual nature affects its reporting on the income statement and cash flow statement. (1) In turn, the conceptual nature of the income tax relates to the entity concept in accounting and to the different theories of the accounting entity. The FASB conceptual framework does not resolve this controversy, nor does the impending joint FASB-IASB revised conceptual framework show much promise of resolving it [see FASB, 2008a, 2008b].

Surprisingly, the conceptual nature of the corporate income tax has never been fully resolved [e.g., Storey, 1966, p. vii]. Most accountants and accounting standard setters say that the corporate income tax is an expense. However, companies do not characterize corporate income taxes as an expense and do not report it among expenses on the income statement. Most companies report an income statement deduction as "provision for income taxes" or just "income taxes," rather than as "income tax expense." Moreover, this deduction may not include all of the income taxes for the period. Due to intraperiod income tax allocation, corporate income tax may be reported partly in discontinued operations, extraordinary gain or loss, other comprehensive income, prior period adjustment, and/or additional paid-in capital.

Initially, this paper examines the entity concept in accounting and three theories of the accounting entity: the proprietary, entity, and residual equity theories. (2) It then examines an extensive literature on the conceptual nature of the corporate income tax and how its conceptual nature affects its reporting on the income statement and cash flow statement. This paper demonstrates that within the context of a coalesced (or fused) proprietary-entity theory of the accounting entity, the corporate income tax is best viewed as an expense. …

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