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