Like a number of other big companies, Bank of America last week announced an extra holiday gift for its employees – $1,000 bonuses tied to the passage of tax cuts pushed by President Donald Trump.
The move also provided an extra treat for the employers themselves: By making the announcement before the end of the year, the companies were able to take a bigger tax deduction than they would have been able to if the payments came in the new year.
That’s because the corporate income tax rate is falling to 21 percent next year from the current 35 percent. Companies use an accounting method in which they tally income and expenses for tax purposes when they become certain, which can occur before they actually receive or shell out the cash.
By announcing $145 million in bonuses this year, Bank of America can take about $50 million off its tax bill at the current 35 percent tax rate, compared with about $30 million at the 21 percent rate next year. That’s a savings of about $20 million.
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Similarly, the Wall Street Journal reported last week that telecommunications giant AT&T could save about $28 million by announcing bonuses for 200,000 workers before the end of the year.
U.S. corporations lobbied heavily for the sweeping tax changes signed into law last week by Trump, but the legislation’s passage has sent companies scrambling at year end to adapt to the tax overhaul, including pulling together far-flung directors to approve year-end bonuses.
“In general, companies would want to try to shift expenses as much as they can into 2017 and then defer income into 2018,” said Andrew Schmidt, associate professor of accounting at N.C. State who specializes in corporate taxes. “It’s funny games.”
In announcing the bonuses last week, Bank of America CEO Brian Moynihan said the No. 2 U.S. bank by assets was passing along the payments in a “spirit of shared success.” The bonuses are going to U.S. employees making up to $150,000 per year in total compensation.
The bank declined to comment beyond Moynihan’s announcement. To be sure, $20 million in savings is a relatively small amount for a company that booked $67 billion in revenue and $7 billion in income tax expense through the first nine months of the year. Bank of America also makes bonuses a regular part of its annual compensation.
While the new tax law will reduce Bank of America’s corporate taxes for years to come, the legislation will put a dent in its fourth-quarter 2017 earnings that will be announced in January. Those results will be reduced by $3 billion because of a lower valuation of certain deferred tax assets, according to a securities filing last week.
Companies create these assets during unprofitable years, such as during the financial crisis, but can use them in the future to offset their taxes. These assets are worth less now that the corporate rate is going down.