Q1
The companies mentioned
in the article all hold large amounts of Deferred Tax Assets (DTAs) on their
balance sheets. For example, Citigroup currently hold $53.3 billion in DTA.
Ford also holds a considerable amount standing at $12.9 while AIG follows very
closely with $12.8 billions within the U.S. A tax cut will see these companies
find ways to bring their DTA holdings to their fair accounting values. The only
way for the companies to achieve this is through write down of huge portions of
the DTAs. The written down values must then be charged to the earnings of the
respective companies as expenses. Consequently, the companies must then report
these added write down expenses explaining the heightened level of reported
expenses. Examples of such huge write down expenses included AIG expected write
down of about $2.6 billion. Similarly, Ford contemplates writing down $51.9
billion in the event of a tax cut to 28% down from the current 35%.
Q2
The proposed tax cut
was never going to benefit all companies. For example, some of the companies
holding huge DTAs would see the value of their assets go down which would in
turn have a negative impact on investor confidence. Potential beneficiaries of
the cut are companies that would be able to report taxable income when the cut
take effect. These companies would then be able to defray their tax bills using
their holdings of DTAs. Also to benefit from the cuts are companies that do not
hold any deferred tax asset at the moment as they will not have to write down
any of that asset against their earnings.
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