Strategic Finance ...April 2012
It has been a long time since financial accounting has been a topic of
discussion in Congress. But suddenly it is in vogue as the House begins to
consider a corporate tax reform bill. Rep. Dave Camp (R-MI), chairman of the
House Ways and Means Committee, held a hearing in February on how accounting rules affect corporate evaluations
of potential changes to tax policy. This discussion generally devolves
into a comparison of the financial accounting effects of lower corporate income
tax rates versus their effects with regard to retaining accelerated
depreciation or expensing. Those accounting effects are important because
Corporate America is going to have to chose between lower rates and tax
incentives. They can't have both.
Of course some tax incentives have stronger
GAAP implications than others. "Like most companies, we are strongly
influenced by tax incentives that improve our GAAP financial reporting metrics,
such as our reported income, effective tax rate and earnings per share,"
states Mark Schichtel, senior vice president, chief tax officer, Time Warner
Cable, Inc. He mentions the research credit and Section 199 domestic production
incentive as examples.
But he adds, "Given the capital
intensity of our business, we rely even more on timing incentives that do not
impact GAAP financial reporting, such as expensing and accelerated
depreciation, which significantly enhance our actual cash flows and our ability
to invest."
Economists, however, cite financial accounting implications to dispute
those who claim "timing incentives" such as accelerated depreciation should
be valued above lower corporate tax rates. Thomas Neubig, national director of
Ernst & Young LLP's Quantitative Economics and Statistics Practice, says a
lower corporate tax rate would lower financial statement effective tax rates
and increase book net income for most corporations. Accelerated depreciation
offers only a timing benefit, and doesn't reduce corporations' financial
statement effective tax rate or increase reported book profits. "Many
corporate tax executives value permanent book-tax differences higher than
temporary book-tax differences," Neubig emphasizes. "They also value
the permanent benefit of a lower corporate tax rate more than a temporary
cash-flow benefit. Reducing the corporate tax rate would immediately lower
corporations' financial statement effective tax rates, thereby increasing their
reported after-tax book profits."
Michelle Hanlon, associate
professor of accounting and taxation at the Sloan School of Management at the
Massachusetts Institute of Technology, argues that tax incentives aren't all
they are cranked up to be anyway. She mentions bonus depreciation and the
Section 199 deduction. For example, she explains that companies respond less
than predicted to bonus depreciation partly because the tax savings are not
reflected on a firm’s accounting income statement.
