From http://uk.businessinsider.com/bank-of-america-fourth-quarter-earnings-q4-2018-1?r=US&IR=T:

Like the other big banks, Bank of America took a hit from the recently enacted tax law, writing down \$2.9 billion primarily in deferred tax assets that declined in value.

JPMorgan earlier reported a \$2.4 billion fourth-quarter loss because of the new tax law, and Citigroup reported a $22 billion loss.

My simple minded expectation is that when you lower a tax rate companies should have more money.

I tried reading about 'deferred tax assets': https://www.investopedia.com/terms/d/deferredtaxasset.asp

Where I found:

The simplest example of a deferred tax asset is the carry-over of losses. If a business incurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in following years. In that sense, the loss is an asset.

So perhaps there is a place for clever accounting around expenses and taxes. But what is the exact mechanism? Why some companies are reporting loss due to the new US tax law?


2 Answers 2


The lower tax rate means that they will gain less benefit when they apply their deferred tax assets against their income.

They have large amounts of these assets recorded on their balance sheets and are adjusting them to reflect the new, lesser value.


@ThisIsNoZaku is correct, but I thought I should explain the mechanism. When you have a tax asset, you were required to pay a tax by the taxing authority before GAAP says the income happened. A tax asset, in GAAP terms, is a prepaid liability.

When the tax rates fell and the income was realized, the prepaid tax cannot be recovered. It is gone for good. The tax is extinguished by the prepayment at the old tax levels, but GAAP records a lower tax due than was paid.

In banking, a good example is the loan loss reserve. For GAAP purposes it is a write-down of assets. The tax code does not allow a deduction for this so you pay the tax as if no losses will ever happen. If a loss does happen, it is deductible. Effectively, that payment is a prepayment because expected losses are expected to happen and the firm was overtaxed at the old rate. Now, let us imagine a loss happens. It is deductible but at a much lower rate.

Let us imagine a portfolio of \$100,000 with a \$1,000 loan loss reserve and income of \$10,000. For GAAP purposes, pre-tax income was $\$10,000-\$1000=\$9000$ with taxes of $\$3,000$. For tax purposes, the income was $\$10,000$ with actual taxes of $\$3333$. This creates a Tax Asset of $\$333$.

The next year the tax law changes and there is a loan loss of $\$1,000$. The actual tax savings because the rate lowered was $\$200$ instead of the anticipated $\$333$. For GAAP purposes the $\$133$ needs to be written off.

In practice, this is a real, non-deductible cash loss, but one that happened in a prior year.


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