Nonrecurring income taxes

Nonrecurring income taxes are transitory items that exclusively affect earnings through tax expense. We conduct the first in-depth examination of nonrecurring income taxes to determine whether they are primarily attributable to economic events or managerial opportunism. We find that nonrecurring income taxes have little predictive power for future earnings, are not associated with meeting or beating analyst earnings forecasts, and are not associated with future tax expense restatements. We also provide descriptive information about the tax events that frequently result in nonrecurring income taxes and find that the most common events are tax audit resolutions, valuation allowance changes, tax law changes, mergers, and repatriations. Overall, our findings suggest that nonrecurring income taxes are driven by economics rather than opportunism. We recommend that researchers consider whether the inclusion of nonrecurring income taxes (or specific types of nonrecurring taxes) is appropriate when using effective tax rate levels or volatility as measures of tax risk, avoidance, or aggressiveness.