Companies’ Initial Estimates of the One-Time Transition Tax Imposed by the Tax Cuts and Jobs Act

Journal of the American Taxation Association, forthcoming (https://doi.org/10.2308/JATA-2021-021)

47 Pages Posted: 1 Apr 2019 Last revised: 20 May 2022

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

Texas A&M University - Department of Accounting

Date Written: April 6, 2022

Abstract

We use the Tax Cuts and Jobs Act as a setting to offer new insights into companies’ tax accruals. We examine companies’ estimates of the mandatory one-time transition tax on previously untaxed foreign earnings. We exploit the one-year measurement period provided by SAB 118 during which companies could adjust their initial transition tax estimates to examine how companies’ information gathering and processing costs affect these estimates. We find more accurate initial estimates for companies (1) with political access, (2) with less busy financial statement auditors, and (3) who previously accrued estimated incremental U.S. tax on foreign earnings. Finally, we find companies with incentives to manage external perceptions that they pay their “fair share” of tax are more likely to overstate their initial transition tax estimates. Our study provides evidence of cross-sectional differences in companies’ financial reporting of income taxes during a politically sensitive time.

Keywords: Accounting for Income Taxes; Tax Cuts and Jobs Act; Bias

JEL Classification: H2, M41

Suggested Citation

Chen, Shannon and Erickson, Matthew and Harding, Michelle and Stomberg, Bridget and Xia, Junwei, Companies’ Initial Estimates of the One-Time Transition Tax Imposed by the Tax Cuts and Jobs Act (April 6, 2022). Journal of the American Taxation Association, forthcoming (https://doi.org/10.2308/JATA-2021-021), 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

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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