Extraordinary income is an unusual earning that results from unusual circumstances unlikely to be repeated. For example, if a corporation sells off idle real estate, this would generate income for the company, but it would be extraordinary, because it’s unlikely to keep selling real estate on a regular basis. Such income receives special treatment for tax purposes in recognition of the fact that it is unusual. It needs to be declared separately, and may need to be handled with care. An accountant can provide assistance with determining whether something qualifies as extraordinary income, and how to treat it on tax declarations.
This type of income is nonrecurring. It doesn’t represent a usual and repeatable income source. Things like insurance settlements and sales of assets qualify, while consulting fees, bonuses, and rising revenues from increased sales do not. On the flip side, companies can also declare extraordinary losses, like damage caused by a natural disaster. Since such losses can be difficult to predict and have an impact on the material financial health of the company, they can be considered extraordinary.
In the case of publicly traded companies, there are several obligations with regard to extraordinary income. Like other companies, they must declare the earning on tax declarations and pay appropriate taxes on it. Additionally, they need to discuss the extraordinary income in annual reports or press statements for investors. This makes people with shares in the company aware of the fact that it experienced an unexpected earning which is unlikely to recur. Investors may need to know about this because it could impact the value of the company and its shares.
Receiving large and unexpected payments in a year can throw a company’s accounting off. Companies paying estimated taxes may need to repeat the estimate to provide accurate payments to tax officials. They could also end up with an unusually large tax burden, which they may attempt to offset with write-offs. It is not uncommon for companies to declare extraordinary income and losses at the same time, using the losses to soften the tax burden associated with the income.
Sometimes extraordinary income is not controllable. Firms receiving an insurance payout, for example, may not have the option of accepting installments to spread out their tax liability over several years. In other cases, it may be possible to make adjustments, like not selling off all assets at once.