Corporate Tax Cut Means Long-Term Investment? That’s Unclear

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By Courtney Rozen

U.S. companies are spending on bonuses, acquisitions, and technology, but it’s too soon to know whether the new tax law will spur more long-term investment.

Investors and companies alike still aren’t sure what the federal tax burden will be under the new law, accountants, economists, and analysts said June 6 at the Urban-Brookings Tax Policy Center in Washington.

“It’s one thing to say the bill has improved the environment for domestic investment. It’s another thing to say firms are actually doing that,” Joseph Rosenberg, senior research associate at the center, told Bloomberg Tax.

The law lowered the corporate tax rate to 21 percent from 35 percent, saving many companies millions in taxes—or far less, if anything, depending on other tax factors and their previous effective tax rates.

No Information

There’s no concrete information yet on how companies are using their savings from the new law ( Pub. L. No. 115-97).

Companies’ quarterly reports, coupled with government data, provide an early picture. But economists need more than one quarter’s worth of financial statements to determine the long-term effects, Rosenberg said.

Companies have been left to estimate their tax burden on their financial statements until there’s more concrete guidance on how to implement the law. That leaves investors reliant on tax liabilities uncertain prospects for tax benefits or losses that could change a company’s earnings dramatically.

Investors should “trust until you have more information” when making investment decisions, said Todd Castagno, an accounting and tax policy analyst at Morgan Stanley in New York.

Companies Invest Tax Savings

Stock buybacks and employee bonuses aren’t the only ways companies are investing their tax savings.

They aren’t using their savings to pay down their debt, but some are making capital purchases—like technology upgrades at Google and Apple Inc., Castagno said.

He said he also has seen an unexpected surge in mergers and acquisitions in recent months, compared with what companies said they would do after the law passed. But large companies flush with cash even before the tax cuts might have made those investments without the tax law changes, Castagno said.

In Limbo Without Guidelines

Until the Treasury Department and the Internal Revenue Service finalize regulations, companies are stuck applying Reagan-era tax accounting rules to their financial statements.

“Even when we get more guidance, I think there’s going to be a lot of diversity in practice,” said W. A. Banks Edwards, managing partner of Deloitte LLP’s national tax practice in Washington.

Companies aren’t trying to do anything wrong, Banks said, they are just waiting on more regulations.

“It’s kind of like playing a game without the specific rules,” Jennifer Blouin, a panelist and Wharton School accounting professor in Philadelphia, told Bloomberg Tax.

To contact the reporter on this story: Courtney Rozen in Washington at crozen@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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