Over the past few months we have discussed several of the tax implications of the December 2017 tax law changes. (2017-tax-reform-business-provisions) Today we are discussing how the tax law change could impact financial statement reporting.
The new law reduces the corporate tax rate from 35 percent to 21 percent. Due to the tax rate change, a company will be need to revalue their deferred tax assets and liabilities at the new rate and and reflect that change in its financial statements for the period that includes the date of enactment. For fiscal year companies with tax years that begin before Dec. 31, 2017, but end after that date, the rate change could impact both the current year tax expense and the deferred tax expense, as the tax rate for the fiscal year will be a blended rate.
Companies with large deferred tax liabilities will see two levels of benefit to the rate reduction: the reduction in their current tax liability and the reduction in their deferred tax liability. For example, companies that have deferred taxes by reducing taxable income through accelerated depreciation or other methods of deferring taxes will get an extra bonus from a corporate tax cut, since it applies not only to their regular taxes but also to the deferred taxes they are obligated to pay. Many companies will see their balance sheets improve significantly as they decrease the value of their deferred tax liabilities to reflect the lower tax rates now in effect.
On the other hand, companies with large net deferred tax assets will see a negative effect as they revalue the asset based on the new lower tax rates. These are companies that have overpaid tax in the past and therefore have will have relief on future tax bills. Deferred tax assets may be generated from net operating loss carryforwards, tax credits, timing differences, and a variety of other factors.
If you would like help determining the impact of the change in tax rates on your deferred tax calculation, please contact us.