House Tax Bill--Big Impact on Financial Statements


The House Ways and Means Committee, on Nov. 2, 2017, introduced a long-awaited tax reform bill--the Tax Cuts and Jobs Act of 2017 (H.R. 1). Bloomberg Tax recently talked to Margolin, Winer & Evens LLP’s  Lance Christensen and Jennifer Bobé to understand the possible effects of the bill on companies’ financial statements.

Christensen is a partner serving in the firm’s tax department. He has over 30 years of tax experience in a broad range of industries and subjects. Bobé is a senior manager in the tax department. She specializes in tax planning, tax compliance, and financial planning for high net worth individuals. 

Bloomberg Tax: For companies, what do you think is the most important provision in the bill?

Christensen: I think cutting the top corporate federal income tax rate from 35% to 20% is probably the biggest change. There are a whole lot other changes introduced by this bill too, such as the repatriation tax in the international areas. But the change of the tax rate is going to have a huge impact on companies’ financial statements.

The federal, corporate income tax rate is currently 35 percent. Once the new tax bill is enacted, companies will need to recalculate their deferred tax assets and deferred tax liabilities on their balance sheets based on the 20 percent rate. The impact of the change in tax rate on deferred tax assets and liabilities is recognized as an income tax expense from continuing operations. Therefore, there will also be an impact on companies’ income statements.

For example: if a company has a net operating loss (NOL) of $10 million, 35 percent of $10 million is $3.5 million of deferred tax assets on the balance sheet. But, when calculated under the proposed 20 percent, the deferred tax assets will be $2 million. Therefore, there will be a $1.5 million tax expense impact on the income statement. And similarly, taxable temporary differences will result in lower deferred tax liabilities, such as accelerated depreciation on property and equipment. As deferred tax assets are calculated at the 20 percent rate, companies will also need to remeasure their valuation allowances against deferred tax assets and also adjust those amounts as part of their income tax expense.

Bloomberg Tax: Are there certain industries that are likely to be more affected?

Christensen: I would say technology companies will be more likely to be affected by the bill because those companies conduct a lot of research and development (R&D) activities. They are usually not profitable for a while, until the research is successful. They have huge deferred tax liabilities because of the R&D credits. If the new tax rate is enacted, they will need to recalculate and reclassify those deferred tax liabilities.

In addition, U.S. companies with foreign subsidiaries would also be impacted by the repatriation provision. U.S. companies will be required to recognize tax expenses on deferred foreign earnings. That is a huge change from today’s tax system.

Third-party distributors are less likely to be affected.

Bobé: The bill would reduce the mortgage interest deduction from a million to half a million, the interest would only be deductible on a taxpayer’s principal residence--not if you want to buy a second home. This would certainly impact the real estate industry.

Bloomberg Tax: Do you think the U.S. Securities and Exchange Commission will require companies to disclose the possible impact of the tax bill in their filings?

Christensen: The SEC might want companies to disclose the impact of the tax proposal in the risk factors and Management Discussions & Analysis (MD&A). But, there are a lot of uncertainties at this point. Some provisions might get passed, some might not. Even if some tax provisions get repealed, they might come back in the future. For example, the estate tax got repealed before, but it came back later on. That can happen again.

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