The timing of AT&T Inc.’s
pledge this week to give $1,000 bonuses to more than 200,000 workers once
President Donald Trump signs the tax overhaul may have saved it $28 million.
That is because committing to
making the payment now could let it record the expense in 2017 for tax
purposes. In AT&T’s case, that would mean a $70 million deduction under the
existing 35% tax rate. By contrast, recording the bonus expense in 2018, when
the new 21% corporate rate is in effect, would mean a $42 million deduction.
Similar calculations may be under
way for other businesses that have also promised
tax-bill bonuses or are considering charitable contributions or other
year-end expenses ahead of the tax-law changes.
There is a catch: Mr. Trump might
not sign the bill until the new year. That could push AT&T’s bonuses
into 2018, raising the cost to the telecom giant. The final result depends on
how it has structured its promise to make the payments.
AT&T, like other large
companies, is an “accrual” taxpayer, booking income and expenses for tax
purposes when it is certain of them, in some cases before the cash changes
hand. That differs from “cash” taxpayers, like individuals, who are taxed on
income when they actually receive it.
Under tax rules, compensation
expense is accrued when it passes the “all-events” test—in other words, when
all the conditions for the payments have been met, and the amount is set.
AT&T has publicly tied the
bonuses to Mr. Trump signing the bill, saying it plans to pay them “once tax
reform is signed into law.” In that case, the all-events test wouldn’t be met
until that time, tax experts say. If that doesn’t happen until 2018, AT&T
stands to lose 40% of the tax deduction it could have claimed.
But if AT&T has committed to
paying the bonuses, and the question is only when it cuts the checks, the
company can accrue the payment this year—and saves $28 million on the gesture.
(It also must actually make the payments by mid-March, under IRS rules.)
AT&T has said it will pay the
bonuses over the holidays if Mr. Trump signs before Christmas, but a
spokeswoman declined to say whether the bonuses themselves are contingent on
the president’s signature.
“Most corporate taxpayers would
be better off with a 2017 tax deduction than a 2018 tax deduction,” said James
Salles, a tax attorney at law firm Caplin & Drysdale in Washington. “They
would not want to needlessly complicate their entitlement to a deduction by
saying something that would make it seem contingent on something that might not
happen by the end of the year.”
Tax attorneys say that similar determinations
are likely being discussed around the U.S., as companies figure out whether to
make charitable contributions or ordinary business purchases like equipment and
supplies in 2017 or 2018. If the amount is fixed and the commitment is made by
Dec. 31, accrual companies are on firmer ground claiming the bigger deduction.
“I can guarantee you these guys
are doing everything they possibly can to accelerate deductions before the end
of the year,” said Andrew Schmidt, a North Carolina State University accounting
professor specializing in corporate taxes.
When it comes to bonuses for top
executives, the stakes are even higher: Accruing the bonus in the new year, as
companies often do thanks to provisions giving boards discretion to adjust
payouts, could mean forgoing a deduction altogether. That is because the new
tax legislation will make it more difficult for companies to deduct
pay over $1 million for top officers.
“We have companies who are
rushing to get those bonuses accrued this month, because it’s 35% of whatever
vs. 0% if it’s over $1 million next year,” said Caplin & Drysdale’s Richard
Skillman, who served as deputy chief counsel and acting chief counsel of the
Internal Revenue Service under President George W. Bush.
For AT&T and the bonuses it
plans for rank-and-file workers, the sums at stake aren’t huge. It reported
$3.03 billion in profit for the three months ending Sept. 30, and even
the full $200 million pre-tax cost of the bonus payment pales beside the nearly
$12 billion in dividends it paid in 2016. It is about equivalent to the $193
million AT&T said it paid its top five executives over the past three
Then again, $28 million is still
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