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Corporate Tax Reform, Deferred Taxes, and the Immediate Effect on Book Profits

25 Pages Posted: 15 Jul 2011  

Jana Smith Raedy

University of North Carolina at Chapel Hill

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Date Written: July 14, 2011

Abstract

This paper analyzes the impact of GAAP-mandated adjustments to deferred tax accounts when corporate income tax rates change. Using hand-collected data from the tax footnotes of the Fortune 50, we estimate that a reduction in the corporate tax rate from 35% to 30% would substantially affect the accounting earnings, capital, and effective tax rate of many companies. For the 18 publicly-traded Fortune 50 companies with a net deferred tax asset position, the total drop in accounting earnings would be $12 billion, with the banking industry experiencing some of the largest earnings decreases. For the 31 publicly-traded Fortune 50 companies with a net deferred tax liability position, the total jump in accounting earnings would be $28 billion, with the energy industry enjoying many of the largest increases. Although these large, one-time adjustments to the deferred tax accounts do not affect cash taxes paid, users of the financial statements should be aware that the deferred tax accounts may be significantly altered if and when tax rates change and that these effects will be reflected in net income.

Suggested Citation

Raedy, Jana Smith and Seidman, Jeri K. and Shackelford, Douglas A., Corporate Tax Reform, Deferred Taxes, and the Immediate Effect on Book Profits (July 14, 2011). Available at SSRN: https://ssrn.com/abstract=1885695 or http://dx.doi.org/10.2139/ssrn.1885695

Jana Smith Raedy (Contact Author)

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

Jeri K. Seidman

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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