TaxProf Blog

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

Saturday, February 10, 2018

AT&T, Other Companies Play Tax Arbitrage In Paying Worker Bonuses In Response To Trump Tax Cuts

AT&T LogoBloomberg:  AT&T, Walmart Bolster Their Tax Savings in Paying Worker Bonuses, by Lynnley Browning:

The surprise bonuses that corporations like Walmart and AT&T are bestowing upon rank-and-file American workers are currying favor with the public and President Donald Trump.

But there’s another perk — the companies can use the payouts to minimize their tax bills.

It’s no secret that companies are allowed to deduct most compensation expenses from their taxable income as a cost of doing business. There’s a wrinkle this year, though — since the corporate tax rate was slashed to 21 percent from 35 percent, big firms that account for the expense in 2017 stand to save tens of millions of dollars more in taxes than if they book the expense in 2018.

“That’s a big tax arbitrage play,” said Len Burman, a co-founder of the Urban-Brookings Tax Policy Center and a former senior Treasury tax official. ...

Take, AT&T -- the first major company to announce in mid-December that it would pay one-time $1,000 bonuses to more than 200,000 employees. Since employees received their bonuses before Jan. 1, it’s reasonable to infer that the company would have accrued the expense in 2017. That means the second-biggest wireless carrier would be able to deduct $200 million from its taxable income, and under the old corporate rate of 35 percent, save $70 million in taxes. ... If the company had booked the expense in 2018, it would have only been able to save $42 million.  ...

Not all companies are booking their bonus payouts as 2017 expenses. Walmart, the nation’s largest private employer, said Jan. 11 that it would spend an additional $700 million on wage increases and special bonuses for eligible employees. The retailer isn’t accounting for that charge in 2017, according to Randy Hargrove, a Walmart spokesman. If it had, Walmart could have saved $245 million. Instead, the $700 million deduction at the 21 percent rate will equal tax savings of $147 million.

Tax, Tax Policy in the Trump Administration | Permalink


Well, if you are going to make the payment in any event, prudence suggests doing so when it is most beneficial. Every rate change since the history of the income tax begat this sort of behavior relative to timing of payments or of income to take advantage of the lower rate in a given period (what is so cynically called "arbitrage").

Posted by: jason | Feb 12, 2018 5:30:16 AM