November 11, 2012
WSJ: Tax Twist -- Cutting Corporate Tax Rates May Cost Billions
Wall Street Journal: Tax Twist: At Some Firms, Cutting Corporate Rates May Cost Billions:
What Uncle Sam has given to the earnings of companies like Citigroup, AIG, and Ford he soon might take away.
President Barack Obama has said, most recently during last month's presidential debates, that the 35% U.S. corporate tax rate should be cut. That would mean lower tax bills for many companies. But it also could prompt large write-downs by Citigroup, AIG, Ford and other companies that hold piles of "deferred tax assets," or DTAs.
After posting big losses, these companies have tax credits and deductions they can use to defray future tax bills, thus providing a boost to earnings. But a tax-rate reduction means some of those credits and deductions, counted as assets on the balance sheet, would be worth less, since lower tax bills would mean fewer opportunities to use them before they expire. That would force the companies to write down their value, resulting in charges against earnings. ...
The double-edged sword has some tax watchers wondering whether companies may pressure Congress for a provision enabling them to avoid write-downs if rates are lowered. A spokeswoman for Lockheed Martin, which has $5.4 billion in deferred tax assets, said the company believes tax change should "include transition measures that mitigate impacts and avoid negative unintended results" for companies that based their planning on the current tax system.
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Ah yes, the Law of Unintended Consequences Strikes Again.
Those of us in the rational world have always worried about booking DTA's, but have had little success in challenging the practice since it improved balance sheets.
After all if you cannot make money the old fashioned way, ie revenues greater than expenses why not make it with accounting gimmicks.
Posted by: David R. | Nov 11, 2012 9:09:39 AM
how does the value of credits decrease?
Posted by: LV | Nov 12, 2012 10:40:01 AM
Get over it! Investor analysts put next to no weight to a one-time tax event, especially one that will only increase cash flow in the future! This is a tempest in a teapot (not tea party) and will have no effect on stock prices.
Posted by: DLN | Nov 12, 2012 1:51:43 PM
This is a good accounting story. Lockheed would be better off,and its stock price should rise, as a result of abolishing the corporate income tax, but its balance sheet will worsen. The reason is that accountants list NOLs as an asset, but don't list future taxes as a liability, even if more likely than not they'll have to be paid. I can't see a better alternative to the present system, tho.
Posted by: Eric Rasmusen | Nov 13, 2012 3:24:27 PM