Tax Benefit and Extraordinary Loss

Regarding your question as to the legitimacy of moving the tax benefit of $300,000 into income tax related to operations from the extraordinary item area, the FASB states that the tax effects of pretax income/loss from continuing operations should be kept separate from items that are not included in continuing operations.

The suggested moving of tax benefits would be in violation of GAAP and FASB rulings.

FASB ASC is 740-20-45-7, (Allocation to Continuing Operations)

The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, extraordinary items, discontinued operations, and so forth) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations. That modification of the incremental approach is to be consistent with the approach in Subtopic 740-10 to consider the tax consequences of taxable income expected in future years in assessing the realizability of deferred tax assets. Application of this modification makes it appropriate to consider an extraordinary gain in the current year for purposes of allocating a tax benefit to a current-year loss from continuing operations.

The allocation of the $300,000 tax benefit due to an extraordinary loss to continuing operations is not consistent with GAAP and the FASB rulings. To stay in accordance with GAAP and FASB, it is my recommendation that the tax benefit due to the extraordinary loss and the extraordinary loss stay together, in the extraordinary items area of the income statement.