By Maxwell Murphy And Angus Loten
A surprising number of finance chiefs could miss their corporate
earnings targets if an 11th-hour deal isn't reached in Washington
to retroactively reinstate more than 50 tax breaks that expired
last year.
In recent weeks, dozens of companies have reaffirmed financial
forecasts that include millions of dollars in tax credits and
deductions. It's a risky bet as companies start to close their
books on 2014. But, if history is any guide, the political drama in
Congress could end with extensions and handshakes.
The House voted late last week to extend the tax breaks only
through 2014. The Senate must vote on the matter before its holiday
recess or the debate will drag into next year. Despite the
political brinkmanship, President Barack Obama's administration has
signaled he will sign the bill into law.
"It's just harder than heck to plan," said John Stephens, chief
financial officer of AT&T Inc. "You're going to be more
careful" about your tax assumptions and future spending plans.
Mr. Stephens didn't bake an extension into his forecasts, but he
said many CFOs do because it can help investors compare results
with those of prior periods.
Stryker Corp. added five cents a share to its earnings
projections based on renewal of the tax breaks. Eastman Chemical
Co. estimated that if talks on Capitol Hill fell apart it would
crimp the company's forecasts by about a dime a share.
Johnson & Johnson said missing out on the
research-and-development tax credit alone would raise its effective
tax rate by half a percentage point.
The three companies made their disclosures in recent conference
calls with analysts and investors, according to transcripts
provided by FactSet.
Eastman Chemical wouldn't elaborate. Stryker and J&J
declined to comment.
Not all market watchers are comfortable with companies banking
on laws that haven't passed. "My advice to management teams is to
err on the side of caution," said Mike Matson, an analyst with
Needham & Co. who follows Stryker and other companies that
factored a deal in Congress into their financial estimates.
If the tax measures aren't approved, Stryker might miss its
earnings forecast, he said, but "there is an asterisk there. They
have an excuse."
Washington typically reinstates popular tax breaks--often at the
last minute and retroactively. The R&D credit has been renewed
15 times since 1981, and has sometimes lapsed for over a year. But
firms have gotten the break eventually, except for a 12-month gap
nearly two decades ago, according to Brian Bratten and David Hulse,
professors at the University of Kentucky's Gatton College of
Business and Economics.
Congress's Joint Committee on Taxation has estimated that
extending the credits this year would add nearly $42 billion to the
nation's deficit over the next decade.
John Gimigliano, head of the tax legislative group at KPMG LLP,
called the House bill "a lowest-common-denominator deal. Everyone
wanted something better than they got."
CFOs might celebrate the tax breaks, which also apply to
equipment purchases and allow some profits to be shifted tax-free
between international subsidiaries. But a one-year extension means
they would once again be planning for next year's taxes without
certainty.
Finance chiefs generally would prefer that the popular tax
breaks be made permanent, as part of a broader tax overhaul.
Federal, state and local taxes add up to about 40% of a company's
profits, but many companies use tax incentives, foreign
subsidiaries and other legal methods to pay a much lower rate.
"Make this a permanent feature of the tax code," said Tom
Stueve, senior director of tax for Tennant Co., a Minneapolis-based
maker of industrial cleaning equipment. "R&D is a critical part
of our business," he added, and "we are almost at the whim of
Congress here."
For smaller businesses, which often lack thick financial
cushions, every lapse can have serious, bottom-line
consequences.
Among the expired tax credits is one that allowed small
companies to deduct as much as $500,000 in equipment spending. When
the provision lapsed in January, the maximum deduction fell to
$25,000.
Ken Barnhart, president and chief executive of Occam Group Ltd.,
an Edina, Minn., company that designs and hosts cloud-computer
systems for businesses, said the $500,000 deduction limit gave
Occam the resources to double its business. It could also pass on
the tax savings to customers. When the limit fell this year, Mr.
Barnhart said, "we lost a lot of business."
Making the lapsed tax provisions retroactive "won't bring back
that lost business," he said, adding, "Taxes are taxes, but stop
yanking this stuff around and give us a bigger window on the
future. These guys need to make up their minds."
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