Accounting for Income Taxes

Accounting for Income Taxes is the most comprehensive review of AFIT research. It is
designed both to introduce new scholars to this field and to encourage active researchers to
expand frontiers related to accounting for income taxes.

Accounting for Income Taxes includes both a primer about the rules governing AFIT (Sections
3-4) and a review of the scholarly studies in the field (Sections 5-8). The primer uses accessible
examples and clear language to express essential AFIT rules and institutional features.
Section 3 reviews the basic rules and institutional details governing AFIT. Section 4 discusses
ways that researchers, policymakers, and other interested parties can use the tax information
in financial statements to better approximate information in the tax return. The second half of
the monograph reviews the extant scholarly studies by splitting the research literature into four
topics: earnings management, the association between book-tax differences and earnings
characteristics, the equity market pricing of information in the tax accounts, and book-tax
conformity. Section 5 focuses on the use of the tax accounts to manage earnings through the
valuation allowance, the income tax contingency, and permanently reinvested foreign earnings.
Section 6 discusses the association between book-tax differences and earnings
characteristics, namely earnings growth and earnings persistence. Section 7 explores how tax
information is reflected in share prices. Section 8 reviews the increased alignment of accounting
for book purposes and tax purposes. The remainder of the monograph focuses on topics of
general interest in the economics and econometrics literatures. Section 9 highlights some issues
of general importance including a theoretical framework to interpret and guide empirical AFIT
studies, the disaggregated components of book-tax differences and research opportunities as
the U.S. moves toward International Financial Reporting Standards (IFRS). Section 10
discusses econometric weaknesses that are common in AFIT research and proposes ways to
mitigate their deleterious effects.