President Donald Trump has signed a tax overhaul and companies are rejoicing. But the most immediate effect of the new law could be a one-time accounting headache. Hours after the bill signing, announcements started to roll in from some of the world’s biggest companies— with some spectacular numbers. While the bill benefits most companies through a lower rate, it also requires them to recalculate some of the tax positions they may have been holding on their books for years.
Biotechnology company Amgen Inc. said it would take a $6 billion to $6.5 billion charge. Bank of America Corp. plans to take a $3 billion hit, and Credit Suisse Group AG will take a writedown of $2.32 billion.
The one-time changes are related mostly to what are known as deferred tax assets that accumulate on balance sheets when companies overpay taxes or take tax losses. On the other side of the ledger, deferred tax liabilities pile up when they’ve underpaid taxes on depreciated assets.
The tax law lowers the corporate rate from 35 percent to 21 percent and in the long run, most companies will benefit. But with that sharp cut, the Republican
tax makeover scrambles the math around the tax instruments, meaning some companies will post significant one-time gains or losses as they bring their books into harmony with the new code by year-end.
Experts said investors are largely aware of the rule, but it could cause some confusion in the stock market as the numbers drop or when earnings reports emerge. Institutional memory may be lacking—the rule only has real impact when corporate rates are cut sharply, and the last time that happened was three decades ago. “People might be confused, but the sophisticated people will say ‘don’t worry about it, it’s a one-time thing,’ ” said Marty Sullivan, chief economist at Tax Analysts.
Among the companies that could see the biggest changes
are banks that suffered steep losses during and after the 2008 financial crisis.
Citigroup Inc. executives said that the lender expects to take a noncash charge to fourth-quarter earnings of about $20 billion, as a result of writing down its tax assets. “All the sudden, the jerk in accounting says you have to drop a billion-dollar loss, so you have to report a negative to shareholders,” Sullivan said.
“In any other situation, that would be cataclysmic.”
Credit-card company American Express Co. has net deferred tax assets of $2.3 billion.
Companies have to account for the tax bill’s changes in the period it was enacted, which means the pressure is on for corporate accounting departments.
‘Tax cuts to cost $1trn after growth’
The tax changes that President Donald Trump signed into law will reduce federal revenue by more than $1 trillion over the next decade, even after accounting for their beneficial effects on the US economy, according to Congress’ tax scorekeeper.
That finding by the nonpartisan Joint Committee on Taxation runs counter to arguments advanced by the Trump administration and by congressional Republicans, who’ve argued that their package of tax cuts would stimulate enough economic growth to pay for itself.
Tax reductions for businesses and individuals will increase US gross domestic product by about 0.7 percent over the 10-year window, according to JCT’s estimate. As a result, the cuts, which total about $1.456 trillion, would generate $451 billion in growth, JCT’s analysis showed. Growth would be slightly reduced by increased interest on the federal debt of about $66 billion over the period, JCT added. The bottom line: almost $1.1 trillion in deficits over the 10-year period.