An early Christmas present to Corporate America arrived December 22, 2017 when President Trump signed the Tax Cut and Jobs Act (TCJA)into law. That piece of legislation re-engineered large portions of the Internal Revenue Code as it relates to corporations. While the Act simplified some aspects of corporate taxation, it overturned analysts’ conventional understanding of how taxes interact with financial reporting and in turn, affect securities valuation.
Compounding the urgency for all players to understand effects, the Act arrived only nine days before the end of the year. The effects of the Act are required by generally accepted accounting principles to be recognized in the period in which they’re enacted – in this case, the fourth quarter of 2017. Virtually all companies have been affected by the Act, and they have scrambled to reasonably corral the effects in time for fourth quarter and 10-K reporting. Guidance for analysts may come along with that reporting, but analysts and investors still need to know for themselves how all the pieces fit together so they can decide what is reasonable – and what is not reasonable.
In the year ahead, it would be very surprising if there are only a few modifications to the analyst tax guidance given by companies. Given the tight deadlines, the density of the Act, and the continuing interpretations of its provisions by firms, their auditors and their tax counsel, it seems highly probable that effective tax rates will be a fluid part of firms’ 2018 guidance. Best practice for analysts: get a grip on the parts most likely to affect the most companies, right from the start.