Recently, former President Trump floated the idea of lowering the corporate tax rate from 21% to 20%. For those involved in tax provisions, this brings back vivid memories of the Tax Cuts and Jobs Act (TCJA) of 2017, which dramatically slashed the corporate tax rate from 35% to 21%.
The announcement of the TCJA led to immediate and significant implications for ASC 740 professionals, despite the new rate not taking effect until the following year (2018). The urgent need to update provision calculations for the revised tax rate caused many to cancel vacations and miss holidays. The current provision calculations might have been safe, but the deferred provisions required an immediate overhaul.
The Effect on Deferred Tax Assets and Liabilities
Deferred tax assets (DTAs) and liabilities (DTLs) sitting on the balance sheet were initially valued at the 35% federal tax rate. With the rate cut to 21%, the values of these deferred items had to be adjusted accordingly:
Deferred Tax Assets (DTAs): These became less valuable due to the lower tax rate. Companies with significant DTAs had to recognize additional tax expenses, as the difference in value between the old and new tax rates represented a reduction in their asset value.
Deferred Tax Liabilities (DTLs): Conversely, DTLs became less costly. Companies with substantial DTLs saw a tax benefit (income) as the liabilities were revalued at the lower tax rate, reducing their overall liability.
Looking Ahead: Potential Changes
While a potential reduction from 21% to 20% might not be as significant as the TCJA’s reduction from 35% to 21%, it still poses a considerable challenge for tax provision professionals. A 1% change might not seem drastic, but it will still necessitate updates to provision calculations and revaluation of DTAs and DTLs.
Tax provision experts might want to consider travel insurance for their next vacations, just in case a similar situation arises where they need to quickly respond to legislative changes affecting tax rates.
The potential lowering of the corporate tax rate to 20% serves as a reminder of the significant impacts that tax rate changes can have on provision calculations and deferred tax items. Tax provision professionals must stay vigilant and prepared for any adjustments that may be required, reflecting on the lessons learned from the TCJA of 2017.