Fiscal Cliff Deal to Yield..Tax Benefits...

• January 2, 2013, 2:33 PM ET

Fiscal Cliff Deal to Yield Fourth Quarter Tax Benefits in Earnings

Emily Chasan 

Senior Editor

Fourth-quarter earnings reports from some companies will benefit from a full year’s worth of tax credits that were approved retroactively for 2012 as part of Congress’ last-minute deal to avoid the fiscal cliff.

Research-heavy technology and drug companies can now claim renewed tax credits for research and development, and financial firms could see reductions in their tax rates due to the extension of a credit for overseas financing activities. “It’s going to have a positive impact for sure,” said Robert Willens, an independent tax and accounting expert at Robert Willens LLC in New York.

Companies that continued research and development activities during the year are likely to book gains from a year’s worth of tax credits all at once in the fourth quarter as a result of the legislation. The research tax credit, which expired at the end of 2011, is now in effect for two more years through the end of 2013,  and is expected to cost the government $14.3 billion over ten years. “In some cases this has a pretty substantial effect, accounting for 3 or 4 percentage points off the tax rate,” Willens said, noting the extension will increase net income for many companies by reducing their provision for income taxes.

Companies including Cabot Microelectronics Corp. Forest Laboratories Inc. and L3 Communications Corp. said in regulatory filings over the past year that increases in their effective tax rates by 120 to 130 basis points were primarily due to the expiration of the research tax credit.

The  tax credit extension may be a bit of déjà vu for companies, as the credit was also allowed to lapse in 2010, and several companies adjusted fourth quarter results when it was retroactively reinstated for 2011. The credit first went into effect in 1981 and has been extended 13 times, but companies have long been wary of its impermanence. The Obama administration proposed making it permanent last year.

Financial firms may see an even bigger impact from the extension of a tax exemption for active financing income, that lets banking and financial firms avoid tax on a foreign subsidiary’s earnings if it is actively financing deals. The extension of the provision is estimated to cost $11.225 billion over ten years, and could represent as much as 10 percentage points off of corporate tax rates for some financial firms, Willens said.

The active financing provision, which had also expired at the end of 2011, is also now set to remain through the end of 2013. Companies including American Express Co.and Citigroup Inc. had cited in regulatory filings last year impacts to their tax rates from Congress’ previous failure to renew the program.

http://blogs.wsj.com/cfo/2013/01/02/fiscal-cliff-deal-to-yield-fourth-quarter-tax-benefits-in-earnings/