Companies that benefit from a new tax break should book it as a âspecial deductionâ against taxable income over time.
That recommendation came from the Financial Accounting Standards Board (FASB) Wednesday, and U.S. companies are likely to greet the news warmly because it means they won't take a one-time hit on earnings, Dow Jones Newswires reported. Companies will not need to immediately adjust their deferred income-tax balances based on the new, lower rate.
The tax break is included in the âAmerican Jobs Creation Act of 2004â that President Bush signed into law on Oct. 22. It cuts the top tax rate on American manufacturers that take part in domestic production by 3 percentage points to 32 percent. The reduction, which replaces a now-repealed subsidy for U.S. exporters, will phase in through 2010. The subsidy was found to be illegal by the World Trade Organization.
Under FASB's proposed accounting treatment, in the periods when the benefits are taken, companies would be able to lower the income that is subject to tax. The effect is lower income-tax expenses. The rule is still subject to public comment, FASB spokesman Steven Getz said. The comment period is 15 days.
"In general, the tax deduction will be a real economic cash savings for companies that should positively impact valuation and earnings," said accounting analyst Chris Senyek at Bear Stearns & Co.
The legislation also gives companies a one-year window to take advantage of a much lower tax rate - 5.25 percent versus 35 percent - on profits repatriated from overseas. FASB members also agreed Wednesday to give companies more time to evaluate the effects of the provision.