How to Calculate Income Before Extraordinary Items

by James Green; Updated September 26, 2017

Extraordinary items on a company's income statement represent costs that do not occur regularly. It is an item that is subtracted from a company's income, such as the costs associated with repairing a farm building after an earthquake. Extraordinary items are subtracted after tax for both continuing and discontinued operations, but before any depreciation is taken into account.

Step 1

Obtain the company's income statement. All companies must prepare an income statement for the purpose of paying taxes. On the income statement, you will need the company's income before taxes and any income gained from discontinued operations that the company no longer carries out.

Step 2

Calculate the income tax expense for the company using the company's current federal and state tax bracket. So, if income before taxes is $120,000 and the tax rate is 27 percent, the income tax expense is (0.27)($120,000) = $32,400.

Step 3

Subtract the tax expense from income before taxes to calculate the income from continuing operations. Using the same example, subtracting $32,400 from $120,000 gives a figure of $87,600.

Step 4

Calculate the gain on discontinued operations after tax. If the company made $10,000 for the first six months of the year in an activity no longer carried out by the company, and this was taxed at a rate of 14 percent, the gain on discontinued operations after tax would be $10,000 - (0.14)($10,000) = $8,600.

Step 5

Add the income from continuing operations to the gain on discontinued operations after tax. Using the same example, adding $87,600 to $8,600 gives a figure of $96,200. This figure represents the company's income before extraordinary items are added.