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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, February 9, 2018

How The Trump Tax Cuts Handed GM A $5 Billion Loss

GM Logo (2018)Bloomberg:  How a Tax Cut Handed GM a $5 Billion Loss, by Megan McArdle:

General Motors Co. had a pretty good quarter in the last months of 2017. Sales of its SUVs surged, surpassing those of competitors like the Ford Escape and fueling fat gross margins. Looking ahead to 2018, the company forecasts strong earnings. And of course it’s staring at a healthy tax cut, courtesy of the administration of President Donald Trump and Republicans in Congress.

Naturally, when the time came to do its earnings call, the company reported a $5.15 billion loss for the quarter.

Actually, if you know a bit about accounting, this is entirely natural. In lowering the company’s corporate taxes, the government suddenly made the ability to avoid those taxes less valuable.

Between 2005 and 2008 (when the government stepped in to bail it out), GM lost roughly $80 billion. These are gruesome numbers. But that grim cloud had a silver lining: Those staggering losses created something called an “NOL carryforward.” ...

GM’s enormous losses generated an enormous future benefit, allowing the company to earn income without paying taxes on it. Quite properly, accounting requires them to carry that future benefit as an asset on the company’s books. But when the tax rate goes down, that benefit is no longer so beneficial. A “get out of taxes free card” is obviously more valuable when your tax rate is 35 percent than when it is 21 percent. The asset has to be written down -- which in turn shows up as a charge against net income.

Welcome to the wonderful, weird world of accounting, where something positive, like lower taxes, can show up as a negative on your books. Luckily for GM, the market wasn’t fooled; although the company has suffered somewhat from the market’s general decline, it got a nice bounce off the earnings call where it announced that multi-billion-dollar loss.

http://taxprof.typepad.com/taxprof_blog/2018/02/how-the-trump-tax-cut-handed-gm-a-5-billion-loss.html

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