Companies Hit Due to Tax Reforms, but Hopeful of Long-term Gains

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The corporate tax cuts may probably reap long-term gains for many companies, but due to U.S Accounting rules these companies are hit at present.

Last week J. P. Morgan Chase announced that due to the Tax Cuts and Jobs Act it was taking a $2.4 billion charge against its 2017 fourth-quarter earnings. Yet, the company CEO Jamie Dimon and the bank’s chief financial officer, Marianne Lake both believe that the tax reforms are a boon for the country, corporate profits, and the economy.

The Accounting rules also require companies to reflect the impact of any changes in the tax code in the reporting period they go into effect. This has caused J. P. Morgan’s net income to dip by 40% compared with the earlier year’s $4.2 billion.

According to Wall Street analysts, portfolio managers, and investment strategists, this short-term accounting move doesn’t promise paying lower corporate taxes in 2018 and beyond.

JJ Kinahan, chief market strategist for TD Ameritrade, the Omaha-based online brokerage says, “It’s really kind of an accounting adjustment where companies take the pain up front to realize the gain later on.”

The slashed corporate tax rate from 35% to 21% is making the companies, such as J. P. Morgan to write down the value of “deferred-tax assets”. In other words, this means that these companies can use the tax credit to reduce their tax bills in future. This tax credits may come handy especially when a company goes through financial crises.

The companies are willingly taking this tax hit while keeping an eye on the long term benefits. In future these reforms will help the companies paying less tax and thereby increasing their earning. The additional funds available then can be employed for the benefit of the company.

Ken Leon, director of equity research at CFRA, a Wall Street research firm says, “It means more available cash for either investment in the business, higher employee compensation or return of capital to shareholders via dividends or stock buybacks.”