Companies With Large Deferred Tax Assets Urged to Be Wary of Corporate Tax Reform

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By Lydia Beyoud

Large banks and companies with significant deferred tax assets should be wary of the tax accounting that would be necessitated by any reduction to the corporate tax rate, likely causing hundreds of millions in reduced earnings on company accounts, a tax accounting specialist said March 29.

In corporate tax reform, banks and companies with large pension plans, such as Lockheed Martin and Boeing, could be big losers if the corporate tax rate were lowered from 35 percent to 25 percent, said Douglas Shackelford, associate dean and tax professor at the University of North Carolina at Chapel Hill.

Companies could see a drop in earnings because of the reduction in deferred tax assets used to reduce income tax expenses, Shackelford said. DTAs include employee benefits, net operating losses, warranty expenses, and allowances for doubtful accounts, he explained.

Conversely, a lower corporate rate could reduce deferred tax liabilities, creating an immediate boost to earnings on book, he said. Thus, capital-intensive companies with large deferred tax liabilities could receive a major boon, Shackelford said during a panel at the Urban-Brookings Tax Policy Center.

According to one study, Berkshire Hathaway, owned by Warren Buffett, would receive the greatest increase in assets--more than $10 million--among the companies in this category, Shackelford said.

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