What is income from continuing operations?
Income from continuing operations is the after-tax profit or loss generated by a company's business activities that are expected to continue in future periods. It is reported on the income statement before the separate line for discontinued operations, giving readers a clear view of what the ongoing business actually earned.
Under US GAAP (ASC 230) and IFRS (IFRS 5), companies are required to present discontinued operations separately from continuing operations. This ensures that one-time disposal gains, wind-down costs, and the results of sold or abandoned segments do not distort the earnings trend of the core business.
Analysts pay close attention to income from continuing operations because it is a better predictor of future earnings than net income — which can be inflated or deflated by large, non-repeating discontinued operation gains or losses.
Income from continuing operations formula
The key word is from continuing operations for both inputs — you must use only the pretax income and the tax expense attributable to the continuing business, not the total company figures if discontinued operations are also present.
Where it sits on the income statement
The full income statement structure when discontinued operations are present:
Net income equals income from continuing operations plus (or minus) the after-tax results of discontinued operations. This relationship is important: if you only see net income, you cannot tell how much came from the ongoing business versus one-time disposal events.
Continuing vs discontinued operations — what's the difference?
| Attribute | Continuing operations | Discontinued operations |
|---|---|---|
| Definition | Business activities expected to continue going forward | Segments being sold, shut down, or already disposed of |
| IS presentation | Above the discontinued operations line | Separate section, always net of tax |
| Tax treatment | Tax expense allocated to continuing portion | Tax effect shown within the discontinued section |
| Predictive value | Higher — reflects ongoing earnings power | Lower — one-time, non-repeating items |
| Used in analyst models | Yes — base for EPS from continuing ops, PE ratios | Excluded from forward-looking models |
| GAAP standard | ASC 205-20 (US GAAP), IFRS 5 | ASC 205-20 (US GAAP), IFRS 5 |
How to calculate income from continuing operations step by step
- Identify all revenue and expenses from continuing operations. This includes net revenue, COGS, gross profit, SG&A, D&A, R&D, operating income, and non-operating items like interest — but only for the segments expected to continue.
- Exclude any results from discontinued segments. If the company sold a division during the year, remove that segment's revenue, expenses, and any gain or loss on disposal from your continuing operations calculation.
- Calculate pretax income from continuing operations. Revenue from continuing ops minus all costs from continuing ops, including interest and other non-operating items.
- Determine the income tax expense attributable to continuing operations. If the company's tax footnotes split this between continuing and discontinued, use the continuing portion. If not, apply the effective tax rate to the continuing pretax income.
- Subtract the tax expense from the pretax figure. The result is income from continuing operations — an after-tax figure.
Quick example
Worked examples
Example 1 — Profitable year, 25% tax
Pretax continuing income: $500,000 · Tax rate: 25%
✅ Income from continuing operations = $375,000
Example 2 — High tax burden, 35%
Pretax continuing income: $1,200,000 · Tax rate: 35%
✅ Higher pretax, but more goes to tax
Example 3 — Pretax loss, tax benefit
Pretax continuing loss: −$200,000 · Tax benefit: $50,000
⚠️ Loss from continuing operations = −$150,000
Example 4 — With discontinued operations
Pretax continuing income: $800,000 · Tax on continuing: $200,000
Discontinued ops loss (net of tax): −$300,000
Discontinued ops shown separately — doesn't change the $600K continuing figure
Why analysts use income from continuing operations
When a company reports a large discontinued operation — a major asset sale, a spin-off, or a facility closure — net income can look very different from the underlying business trend. Income from continuing operations strips out that noise, making it a more reliable basis for:
- Earnings per share from continuing operations — many analysts and consensus estimates use EPS from continuing operations, not total EPS, to avoid distortion from one-time disposal events.
- Price-to-earnings multiples — using continuing-operations earnings in the denominator gives a cleaner P/E ratio for valuation.
- Year-over-year trend analysis — if a segment was discontinued mid-year, comparing net income YoY would mix different business scopes. Continuing operations normalises the comparison.
- Forward earnings forecasts — analysts only project segments expected to continue. Discontinued results are irrelevant to future cash flows and are excluded from DCF models.
Common mistakes to avoid
- Including discontinued operations in the pretax figure. The most common error. Gains from selling a division, write-downs on assets held for sale, and wind-down costs all belong in the discontinued line — not in pretax income from continuing operations.
- Using total company tax expense without splitting it. If the company has both continuing and discontinued operations, the tax footnotes should show how income tax is allocated between them. Using the blended total will overstate or understate the continuing operations figure.
- Confusing pretax income with after-tax income. Income from continuing operations is an after-tax figure. The pretax income line is an intermediate step, not the final answer.
- Forgetting tax benefits on a continuing-operations loss. A pretax loss from continuing operations generates a tax benefit (deferred tax asset) that reduces the loss. Ignoring this overstates the magnitude of the continuing-operations loss.
- Treating all nonrecurring items as discontinued operations. GAAP defines discontinued operations narrowly — a component of an entity that has been disposed of or classified as held for sale, representing a strategic shift. One-time charges that don't meet this definition stay in continuing operations.
Frequently asked questions
What is the formula for income from continuing operations?
Income from Continuing Operations = Pretax Income from Continuing Operations minus Income Tax Expense related to Continuing Operations. Both inputs must exclude anything related to discontinued segments.
Does income from continuing operations include discontinued operations?
No. By definition, income from continuing operations excludes all gains, losses, income, and expenses related to discontinued operations. Discontinued operations are presented as a separate line below income from continuing operations on the income statement, always net of their own tax effect.
Why do analysts prefer income from continuing operations over net income?
Net income includes the after-tax results of discontinued operations, which are one-time and non-repeating. Analysts use income from continuing operations for EPS estimates, P/E ratios, and forward earnings forecasts because it better reflects the ongoing earnings power of the core business.
Can income from continuing operations be negative?
Yes. If continuing operations generate a pretax loss, subtracting the tax expense (or adding the tax benefit) produces a loss from continuing operations. A continuing-operations loss combined with a large gain from a discontinued segment can result in positive net income — which is why separating the two matters for analysis.
How is income from continuing operations different from operating income?
Operating income (EBIT) is a pretax figure that excludes interest and taxes but includes all operating activities. Income from continuing operations is an after-tax figure that also excludes non-operating items like interest and the results of discontinued segments. Operating income is higher up on the income statement; income from continuing operations is lower.