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The new tax law handed most of the top 50 Fortune 500 companies a collective $137 billion in one-time benefits, while imposing nearly $20 billion in charges on the others due to its effect on their deferred tax assets and liabilities, according to a Bloomberg Tax analysis.
The relatively small sample provides a glimpse of how the corporate rate cut in the 2017 tax act (Pub. L. No. 115-97) expanded many companies’ future net earnings by giving one-time rewards to those that pushed off their tax liabilities and reducing their future tax obligations.
But the new law also punished companies that carried losses forward, paid taxes in advance, or held other forms of deferred tax assets that, under previous law, might have rewarded them more generously in the future, analysts told Bloomberg Tax.
Forty-three of the companies surveyed by Bloomberg Tax received the one-time benefits, while seven others incurred charges.
“It’s indicative that a lot of companies are going to pay a lot less than they thought they had to pay,” said Andrew Silverman, a Bloomberg Intelligence tax policy analyst. “Other companies had been paying taxes when due and were going to receive tax assets, and now they don’t get quite as much.”
Deferred tax assets are more valuable—and deferred tax liabilities more detrimental—to a company’s bottom line under higher tax rates, so for companies with either, the 14 percentage point reduction to a 21 percent statutory rate makes a sizable difference in the value of those balances.
The total changes to companies’ deferred tax balances were calculated based on their reported remeasurements of those balances under the lower corporate rate, and occasionally the lower repatriation rate, in annual and quarterly financial filings, news releases, and earnings calls.
Of the top 50 companies, Berkshire Hathaway Inc. received the biggest benefit by far, with a $29.6 billion reduction in deferred tax liabilities, according to a Feb. 26 annual filing with the Securities and Exchange Commission. Berkshire was trailed by AT&T Inc. and Verizon Communications Inc., with $20.3 billion and $16.8 billion, respectively.
Conversely, General Motors Co. reported the biggest expense in the group, with a $7.3 billion drawdown of its deferred tax assets, according to a Feb. 6 annual SEC filing. Following General Motors were Citigroup Inc. and Bank of America Corp., with respective charges of $6.2 billion and $2.3 billion.
The benefits drove some corporations’ effective tax rates well below zero, and occasionally—as in the case of AT&T—rendered them nearly impossible to compute from the start. The charges, meanwhile, doubled or more than quadrupled some companies’ usual effective rates for a given reporting period.
The analysis of the 50 largest Fortune 500 companies excludes private corporations that don’t file annual or quarterly reports with the SEC. It also excludes government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), as well as United Technologies Corp., which declined to specify how much of its net tax law charge resulted from or was offset by a revaluation of its deferred tax balances.
Companies accumulate deferred tax assets when they have overpaid their taxes or as a result of timing-related accounting differences—when they pay taxes in advance, for example, or carry forward net operating losses or other tax attributes that allow them to offset future tax obligations.
Deferred tax liabilities also arise from timing differences in accounting, such as postponing events that require a company to recognize a tax expense without recording the expense on its financial statements, including deferred employee compensation or a tax underpayment.
The corporate rate reduction, analysts told Bloomberg Tax, might have moved the companies’ earnings per share up or down by a few cents or even dollars. But it amounts to little more than a one-time accounting adjustment that’s often brushed aside during earnings calls in favor of discussing accounting methods outside of generally accepted accounting principles, analysts said. But tax professionals cautioned that these often massive benefits and expenses shouldn’t be completely ignored.
Deferred tax assets and liabilities are essentially “just a timing difference,” said Vicky Tang, an associate professor at the Georgetown University McDonough School of Business who specializes in accounting. Still, she added, “you shouldn’t discount the effect on the effective tax rate” from the changes to the values of those assets and liabilities stemming from the statutory rate change.
Jim Daniels, a partner at UHY LLP in Albany, N.Y., told Bloomberg Tax that for companies with large liabilities, “the reality is their corporate taxes went down,” while those with hefty assets “kind of lost out.” Either way, Daniels continued, “the larger companies have to report it because it’s important to their shareholders.”
AT&T, Verizon, Comcast Corp., Exxon Mobil Corp., Phillips 66 Co., Valero Energy Corp., and Chevron Corp. round out the top of the list of biggest beneficiaries, likely because they belong to the capital-heavy telecommunications and oil and gas refinery sectors, analysts said.
Use of accelerated depreciation, through which companies write off the costs of capital expenses right after they’re purchased, tends to cause deferred tax liabilities to accumulate over time.
“Accelerated depreciation is definitely relevant for refiners,” Pavel Molchanov, senior vice president and energy analyst at Raymond James & Associates Inc. in Houston, told Bloomberg Tax.
However, he added, that’s not the case for all oil and gas corporations. Companies engaged in only oil exploration and production, and not refining—such as Anadarko Petroleum Corp., ConocoPhillips Inc., Marathon Oil Corp., Devon Energy Corp., and Occidental Petroleum Corp.—tend to have little to no tax liability to begin with. (Chevron and Exxon are integrated, meaning they both extract and refine.)
“Refiners in the U.S. pay cash income tax. Companies that produce oil and gas, they as a rule do not pay cash income tax,” he said. “The vast majority of oil and gas companies in this country are producing; tax reform means nothing to them.”
Tech companies generally took a hit from the new law’s repatriation tax. But for companies that already planned on repatriating their foreign earnings under the previous 35 percent rate, the tax act change could be considered a benefit, because the new law’s lower repatriation rate reduces their deferred tax liabilities, tax professionals said.
The tax law requires U.S. multinationals to pay a one-time “transition tax” on income accumulated overseas since 1986. The law treats the income as repatriated as of Dec. 31, 2017, and imposes a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on illiquid assets, such as factories and equipment.
Several factors influenced tech giants’ deferred tax balances, however—likely a reason IBM Corp., Alphabet Inc., Intel Corp., Dell Technologies Inc., Microsoft Corp., and Apple Inc. saw disparate results, with the latter facing a $1.8 billion charge and the others receiving benefits as small as $270 million and as large as $4 billion.
Many in the tech sector hold research and development credits and net operating losses from early startup years, which create large deferred tax assets—and corresponding large charges as their values drop with the 14 percentage point corporate tax rate reduction, Cliff Capdevielle, a managing attorney at San Francisco-based Moskowitz LLP, told Bloomberg Tax.
But companies in the top 50 of the Fortune 500 are generally more established, years beyond holding NOLs from their launch periods and likely not carrying their R&D credits forward, Capdevielle said.
“The bigger companies, obviously, they’re able to use the R&D credits in the current year, and they don’t have any NOLs, so they’re not going to be impacted the same way as companies with R&D credits or unused NOLs,” he said. “Legacy tech companies are not going to be affected that way.”
NOLs are also common in the finance industry. Big banks racked up massive losses in the wake of the recession, and may still have been holding those tax assets when lawmakers passed the tax act late last year.
“Financial companies tend to have deferred tax assets, because of the differences (between book and tax) in accounting for loan losses,” Robert Willens, an independent tax consultant, wrote in an email. “As a residue of the financial crisis, many of them incurred substantial losses which they haven’t yet used, resulting in deferred tax asset balances.”
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