The Magnitude and Accuracy of Companies’ Estimates of the Immediate Financial Statement Impact of the Tax Cuts and Jobs Act

27 Pages Posted: 1 Apr 2019

See all articles by Shannon Chen

Shannon Chen

University of Arizona - Department of Accounting

Matthew Erickson

Virginia Tech

Michelle Harding

Virginia Tech

Bridget Stomberg

Indiana University - Kelley School of Business

Junwei Xia

Indiana University - Kelley School of Business

Date Written: March 18, 2019

Abstract

We provide evidence of the final, immediate financial statement impact of some of the major provisions of the 2017 U.S. tax law changes, commonly referred to as the Tax Cuts and Jobs Act (TCJA). We also provide evidence on the accuracy of companies’ estimates. Using hand-collected financial statement disclosures for a sample of 121 calendar-year-end companies in the S&P 500 Index, we find that the median company in our sample accrued $74 million of income tax (4 percent of 2018 pre-tax income) related to re-measuring deferred taxes and the one-time transition tax on foreign earnings. Multinational corporations accrued larger amounts due to the one-time transition tax, which alone totaled more than $46 billion across 93 multinational companies in our sample. The median company recognized a benefit of $42 million upon re-measurement of net deferred tax liabilities to the lower corporate tax rate of 21 percent. Companies’ 2017 estimates of the immediate TCJA impact were generally accurate. The median company in our sample reported zero adjustments to tax expense in their 2018 10-K filing and the interquartile range of adjustments was from 0.02 to 1.04 percent of 2018 pre-tax income. Our results inform policymakers and other stakeholders in evaluating the immediate effects of the TCJA and companies’ tax reporting process.

Keywords: Tax Cuts and Jobs Act, SAB 118

JEL Classification: H2, M41

Suggested Citation

Chen, Shannon and Erickson, Matthew and Harding, Michelle and Stomberg, Bridget and Xia, Junwei, The Magnitude and Accuracy of Companies’ Estimates of the Immediate Financial Statement Impact of the Tax Cuts and Jobs Act (March 18, 2019). Available at SSRN: https://ssrn.com/abstract=3355011 or http://dx.doi.org/10.2139/ssrn.3355011

Shannon Chen (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Matthew Erickson

Virginia Tech ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Michelle Harding

Virginia Tech ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States
5402313181 (Phone)

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Junwei Xia

Indiana University - Kelley School of Business ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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