Earlier this month, the House Ways and Means Committee introduced their tax reform bill. Bloomberg BNA talked to MWE’s Lance Christensen and Jennifer Bobé to understand the bill’s possible effects on company financial statements.
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?
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.