New Tax Act - Implications to IB Models

Hi there - A few thoughts for you to think about:

1. US federal corporate tax rate drops to a flat 21% beginning in 2018. Will want to keep this in mind when forecasting beginning in 2018. Also keep in mind that companies had big P&L charges in 2017 due to the revaluation of their deferred taxes (if net US DTA, expense -- if net US DTL benefit). I mention this because rolling forward a 2017 effective tax rate into future periods could be distortive due to this. As a finer point, the state tax rate used in a forecast should be adjusted for the new "net of federal benefit" impact, as state taxes paid will now benefit a company's federal taxes less, because the federal rate is lower.

2. Companies that had big profits offshore AND they had previously asserted that they were permanently reinvested - these companies will have shown very big P&L charges in 2017 due to the "transition tax." It basically is a one time penalty/catch up for stashing profits overseas, without paying US taxes. From a cash flow perspective, companies can elect to pay this over 8 years (but P&L charge hits all in 2017), so I would keep an eye on large cash outflows to cover this liability when forecasting cash. Similar to the rate change above, rolling forward a 2017 rate can be a bad idea here if there was a big transition tax charge. As an aside, future dividend distributions from international subsidiaries will now generally get a 100% dividend deduction for US tax purposes.

Note that even if a company wasn't permanently reinvested prior to the passage of the Act, they will still have the cash tax hit from the transition tax, but the P&L charge may not be as big, or even counter intuitively, it may be a net tax benefit because the previous deferred tax liability (representing hypothetical US taxes due if the earnings were repatriated) may exceed the actual taxes due under the new law. Key thing here, is that a Company's 2017 net income needs to be vetted because tax expense can look really strange due to the rate drop and transition tax.

3. The new law allows for better "bonus" depreciation for tax purposes - at least for a period of time (would need to remind myself on the finer details of the phase out schedule). Depending on how detailed you model out deferred taxes and how capital intensive your client is, this could have a material impact on deferred taxes and cash taxes paid in a given year.

4. Their are other provisions of the Act that became effective in 2018, such as GILTI, BEAT, etc. But I'm thinking those are a bit more detailed than a finance person would get into (I may be wrong here). On these items, companies will start to build them into their effective tax rates on their 2018 10-Qs, so I would keep a look out for any fluctuations.

Those are some of the big dogs and a few thoughts. Hope that helps.