New tax law on Earnings

Just wanted to give everyone a heads up on something we will see with the new tax law.

I own some Schwab and so got to see it for the first time when they reported earnings today.

Schwab has deferred taxes on the books as assets, so the new tax law reduces the taxes owed going forward, thus reducing the deferred taxes. Reduction in an asset means a hit to earning because of asset reduction. .03/share for Schwab.

Obviously this doesn’t effect cash flows or the business and is nothing to worry about, but if you own a company that has defered taxes on the books, you will see an eps charge. Just FYI.

Jimbo

11 Likes

Also, I’d add, this just affects income taxes, so it won’t impact pretax income, or EBITDA (which adds back any income tax impact)

You explained it pretty well and succinctly, Jimbo. Companies that have large deferred tax assets on their balance sheets will have big income tax expense in Q4, and companies with large deferred tax liabilities will have big income tax credits (essentially tax income)in Q4. There are a couple articles out recently and nearly ever comment I see at the bottom demonstrates that the folks comments don’t understand it at all.

Although the tax reform didn’t go into effect until 2018, because the law was signed before 12/31/17, the adjustments to the DTAs and DTLs have to be reflected at year end.

-mekong

2 Likes