Corporate Taxes May Get Cut

Consider this: if Japan reduces its Corporate Tax rate as planned, the United States will have the dubious honor of having the highest statutory Corporate Tax rate in the world. While the topic of taxes is always top-of-mind for Accountants in Miami, in recent months it has climbed higher on the national agenda as well. As the sluggish recovery drags on and as issues of debt reduction and job creation dominate the national discussion, the pressure is clearly building for Congress to lower the corporate rate states Miami Accounting managing partner Gustavo Viera CPA.

As an Accountant in Miami, I am a proponent of such a change have argued that it will create a more globally competitive business environment for U.S. firms and stimulate economic growth. President Obama’s deficit-reduction commission recommended a rate between 23% and 29%. At least one U.S. senator, Mike Johanns (R–Nebr.), has called for the rate to be lowered to 20%, while others have even suggested a drop to 10%. No matter the final rate, our Miami Accounting firm agrees most indications point to a reduction coming — and soon.

Corporate Taxes A Significant Earnings Effect

While the news of a rate reduction will likely be warmly received among Accountants in Miami, they will have work to do to address the change. With the enactment of any prospective Corporate Tax changes come many changes for Miami Accounting Firms, current U.S. financial-reporting requirements will cause a financial statement effect in the year the legislation is passed. According to Accountants in Miami pronouncement ASC 740 (formerly FASB No. 109), if the Corporate Taxes rate is lowered, Miami Accounting Firms and finance executives at companies with a net deferred tax liability (DTL) position will need to make an immediate, one-time adjustment to decrease that balance-sheet account while making a commensurate increase in the company’s earnings through the provision for taxes account. Conversely, a company with a net deferred tax asset (DTA) position on its balance sheet will need to decrease that account and decrease earnings. Either of these one-time effects is potentially material and will alter a number of key financial-performance ratios, states Accountants in Miami.

In our Miami Accounting Firms research, we focus on seven important ratios: earnings per share (EPS), percentage change in earnings, and the five DuPont ratios (return on sales [ROS], asset turnover [ATO], return on assets [ROA], financial leverage [LEV], and return on equity [ROE]). With an assumed tax-rate reduction to 25%, our research indicates that for the 239 S&P 500 firms with net DTL positions, fiscal 2010 EPS would have increased by 40%, simply due to the one-time required adjustment. For the 226 S&P 500 firms with net DTA positions, the opposite would occur: earnings would have fallen but by a smaller amount.

Corporate Taxes Looking Forward, Looking Back

As Accountants in Miami, we note that there are two significant financial-reporting issues associated with deferred taxes. Determining the deferred tax amount to be reported in accordance with GAAP requires both a balance-sheet focus and a future statutory-income-tax-rate focus. For our Miami Accounting Firm purposes, we have used the currently enacted U.S. statutory corporate income tax rate of 35%. In practice, however, per ASC 740, DTAs and DTLs are to be measured “using the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized.” If Congress were to pass legislation during 2011 that would lower the rate beginning in 2012, however, the deferred tax amount to be reported on the 2011 ending balance sheet must reflect the effects of that lower rate.

Accountants in Miami could easily overlook the required adjustment (see the formula, below).

If a company currently has a net DTL position of $14 million and in 2011 Congress lowers the corporate tax rate to 25% beginning in 2012, the DTL account must be reduced as of the year-end 2011 balance sheet by $4 million — (.10/.35) x $14 million — and 2011 earnings would also be increased by $4 million.

Widespread Impact

Many Miami Accounting Firms would see the impact of a Corporate Taxes tax change on their financial statements, as deferred tax amounts on corporate balance sheets are both prevalent and substantial. Within the S&P 500, 93% of companies report either a net DTA or a net DTL, as do 71% of all publicly traded companies. There is roughly an equal number of companies with deferred tax assets as with deferred tax liabilities, but the relative size of the net DTL position is larger than that of the net DTA position.

In general, large DTL account balances are most likely to occur in capital-intensive industries like utilities, petroleum and natural gas, and transportation, primarily due to differences in Internal Revenue Service and financial-statement depreciation schedules. Conversely, sizable DTA account balances often exist for companies in industries with large balance-sheet liabilities that have not yet been recognized for tax purposes — contingent liabilities, for example — and at companies with operating losses where the tax law permits carryforward and carryback offsets. Apparel, heavy equipment, and recreation-related businesses lead the list.