How Much Did This Tax Credit Boost Corporate Earnings?
Few people would argue that the most hated stock rally in history has received a great deal of help from the Federal Reserve. The equity bears say the rally will soon stall out, while bulls counter with corporate profits, which are at all-time highs. Either way, the next earnings season will exclude the help of a major tax credit.
Due to the U.S. tax code being longer than 70,000 pages, new corporate perks are made public seemingly every other week. The Wall Street Journal recently completed an analysis that finds first-quarter profits were boosted by a research-and-development tax credit, which allowed well-known companies to legally report a year’s worth of R&D benefits in one quarter.
The tax credit benefits companies by more than $7 billion each year, according to estimates from the Senate Finance Committee. It is not a permanent part of the tax code, but it started in 1981 and has been extended 15 times.
For the first quarter, 465 companies in the S&P 500 cumulatively reported that revenue grew only 2.1 percent, compared to a year earlier. However, the research tax credit helped those companies set aside 5.6 percent less money for taxes, and grow their cumulative profits by 6.7 percent, according to the WSJ. Technology and pharmaceutical companies benefitted most from the credit.
Here’s a look at the five biggest beneficiaries of the R&D tax credit.
5. Caterpillar (NYSE:CAT):
The leader in building the world’s infrastructure saw its tax rate decline from 30 percent to 21.8 percent in the first quarter of 2013, compared to the same period last year. The reduction is estimated to have saved $87 million in taxes.
4. Abbott Laboratories (NYSE:ABT):
The global healthcare company reduced its tax rate from 24.2 percent to only 1.8 percent year-over-year. The plunge is estimated to have saved $103 million in taxes.
3. Boeing (NYSE:BA):
The multinational aerospace and defense company reduced its tax rate from 36.8 percent to 23.1 percent in the first quarter. The move is estimated to have saved $145 million.
2. Intel (NASDAQ:INTC):
The semiconductor chip maker cut its tax rate from 28.2 percent to 16.3 percent in the first quarter. The move is estimated to have saved $290 million.
1. Google (NASDAQ:GOOG):
The Internet giant decreased its tax rate from 18.5 percent to 7.9 percent in the first quarter. The move is estimated to have saved $380 million.
Google was found to be the biggest beneficiary of the R&D tax credit, but the company did inform investors who paid attention. In a filing with the Securities and Exchange Commission, the company explains, “Our provision for income taxes and effective tax rate decreased from the three months ended March 31, 2012 to the three months ended March 31, 2013, primarily as a result of a discrete tax benefit related to federal research and development credit recognized in the first quarter of 2013…This discrete tax benefit was as a result of a retroactive extension of federal research and development credit in accordance with the American Taxpayer Act of 2012, which was signed into law on January 2, 2013.”
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