By Rachel Beck
The Associated Press

Fourth of a series

NEW YORK - More than a boom in business pushed third-quarter corporate earnings ahead of expectations. At some companies, lowering their tax rates helped more than anything else.

So much for the recent accounting scandals putting the brakes on earnings trickery. Companies still have plenty of ways to finagle their books to boost the bottom line.

And that's where reducing tax rates comes in. There's nothing illegal about it, but it surely can distort the picture of a company's health.

"There is a great amount of flexibility when it comes to tax issues," said Bill Fox, a professor of economics at the University of Tennessee. "It is an easy hole for companies to use to lift their earnings."

The third quarter is shaping up to be the best earnings period in three years. Profits for companies in the Standard & Poor's 500 stock index climbed 21 percent, ahead of the 16 percent that Wall Street analysts had been forecasting, according to earnings-tracker Thomson First Call.

Sure, the improving economy played a role in these strong results, but so did some accounting maneuvers that lowered what they owed in taxes.

U.S. companies are generally taxed on their income at a rate of 35 percent. But few end up actually paying that amount.

That's because companies don't just pay one tax rate for everything. It depends on where they do business - some states and countries have lower tax rates than others - or what kind of investments they make.

For instance, they can get deductions on certain purchases, such as buying new equipment for their businesses, or receive tax credits for the business they do abroad. And it's often at the companies' discretion to decide when or how to account for such benefits.

The end result is a lowered effective tax rate, which reflects what is actually paid on each dollar earned.

Companies staff departments filled with tax strategists whose "primary purpose is to bring down the effective tax rate through good planning," said Henry Bubel, a tax attorney and partner at the law firm of Patterson, Bellnap, Webb & Tyler.

While this isn't a new practice, tax experts say figuring out ways to lower tax rates often becomes more prevalent when companies are having a harder time fueling earnings gains. And with the economy finally heating up this last quarter, companies might have felt additional pressures to have their profits come in ahead of expectations.

Companies often give hints about where they see their tax rates going, but they don't have to say in advance if their rates are going to differ from what they had previously forecast. That means a company can bury the news in an earnings release, making it more difficult to see how a tax-rate change is driving the bottom line.

Consider the case of Coca-Cola. The soft-drink giant reported earnings of 55 cents a share excluding one-time items, beating expectations by 3 cents a share - the exact amount Coke gained as a result of a decline in its effective tax rate thanks to a rise in sales abroad.

According to Todd Stender, an analyst at the stock research and money management firm Crowell, Weedon & Co. in Los Angeles, Coke had told analysts in July to expect its year-end tax rate to be about 24 percent. That's far from the 18.4 percent rate the company ended up using in the third quarter and the 22 percent it now expects at the end of the year.

"We didn't see this coming," said Stender, who pointed out that Coke's earnings from its core operations were flat vs. a year ago, while the tax-rate decline and more favorable currency conversions were the real drivers of the bottom line.

This isn't a one-time strategy for Coke. During a conference call with analysts, Coke president and chief operating officer Steve Heyer said the company would "continue to pursue tax-planning strategies which have a favorable impact on our earnings," according to a transcript provided by CCBN StreetEvents.

And Coke isn't the only company to see earnings beat estimates because of a tax-rate decline. The long list includes Kimberly-Clark, Boston Scientific and International Paper.

This kind of maneuvering is just a reminder that companies still have plenty of tools left to manage their earnings. While that might be legal, it's not necessarily right.

Coming Tuesday: Adjusting to new tax brackets