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Tuesday, March 19, 2019
There’s Taxes, and There’s Taxes

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Earlier this month, we chose to analyze the tax reconciliation data for a subset of S&P500 firms. Anyone with a Calcbench subscription is invited to do something similar (or better). Here is a short summary of what we found.

Background and Data:

During the reporting of effective tax rates, companies provide more detailed information on the reconciling of these rates, or the taxes owed, versus the statutory corporate tax rate. At Calcbench, we examined the reconciling items on a systematic basis to observe behavior within this group of firms.

The exercise of systematically reconciling each item and putting them on an apples-to-apples basis is much easier said than done. An example of why this is a challenging exercise is that some firms reconcile to the dollar while others reconcile to the tax rate. In this case, the picture(s) below save us a thousand words.

So we took our data that was in percents and converted it into dollars so that we could try to do a closer comparison.

Once we started looking at the income tax footnotes, we found that there were 5 common reconciling items that impacted corporate taxes owed:

  1. State / Local taxes
  2. Research and Development
  3. Foreign Impacts (e.g. Irish subsidiary)
  4. Share Based Compensation Effects
  5. Domestic Manufacturing Credits

Certainly, there are other contributing factors, with many of them being firm specific. We chose not to examine these for purposes of this exercise. But we may return to firm specific factors at a later date.

Some high level observations from the 2016 annual filings are below:

  • 473 firms out of 500 reported reconciling items with 428 firms reporting profits before tax in 2016
  • 224 reported an effective tax rate (e.g. 25%)
  • 127 reported dollar levels of taxes owed (e.g. $1 billion)
  • 122 firms provided both percentages and dollars owed in detailed breakdowns

Of the 428 firms in our sample that reported profits before tax in 2016, the 5 reconciling items in aggregate are below:

(Note that the State / Local deduction is added back when calculating the federal effective tax rate. We reported the results because the data is significant)

The top 10 foreign reconciling items were taken by the following firms:

The top 10 share R&D reconciling items were taken by the following firms:

The top 10 manufacturing reconciling items were taken by the following firms:

Top 10 share based compensation reconciling items were taken by the following firms:

The top 10 State/ Local reconciling items were taken by the following firms:

The idea behind the data is rather simple. Get data and use it.


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