Healy, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Healy, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?
A)Healy Inc., is managing its tax burden in a more efficient manner than its competitors.
B)Healy Inc., structural effective tax rate is actually quite close to its competitors.
C)Healy Inc., earned more cash profits because of its lower effective tax rate.
D)Healy Inc., is likely to be engaged in tax shelter activities.

Question

Quizplus · Accepted Answer

Healy, Inc.'s effective tax rate of 14% is significantly lower than its competitors' effective tax rates between 32 and 36%. However, the valuation allowance reversal indicates that Healy, Inc. has potential future tax benefits that have not yet been realized. Therefore, its structural effective tax rate (which excludes one-time items like valuation allowance reversals) is likely closer to its competitors' effective tax rates.