AT&T, Wal­mart use worker bonuses to min­i­mize tax bills

The Oklahoman (Sunday) - - BUSINESS - BY LYNNLEY BROWN­ING Bloomberg

The sur­prise bonuses that cor­po­ra­tions like Wal­mart and AT&T are be­stow­ing upon rankand-file Amer­i­can work­ers are cur­ry­ing fa­vor with the pub­lic and Pres­i­dent Don­ald Trump.

But there's an­other perk — the com­pa­nies can use the pay­outs to min­i­mize their tax bills.

It's no se­cret that com­pa­nies are al­lowed to deduct most com­pen­sa­tion ex­penses from their tax­able in­come as a cost of do­ing busi­ness. There's a wrin­kle this year, though — since the cor­po­rate tax rate was slashed to 21 per­cent from 35 per­cent, big firms that ac­count for the ex­pense in 2017 stand to save tens of mil­lions of dol­lars more in taxes than if they book the ex­pense in 2018.

"That's a big tax ar­bi­trage play," said Len Bur­man, a co-founder of the Ur­ban-Brook­ings Tax Pol­icy Cen­ter and a former se­nior Trea­sury tax of­fi­cial.

Take, AT&T — the first ma­jor com­pany to an­nounce in midDe­cem­ber that it would pay one-time $1,000 bonuses to more than 200,000 em­ploy­ees. Since em­ploy­ees re­ceived their bonuses be­fore Jan. 1, it's rea­son­able to in­fer that the com­pany would have ac­crued the ex­pense in 2017.

That means the sec­ond-biggest wire­less car­rier would be able to deduct $200 mil­lion from its tax­able in­come, and un­der the old cor­po­rate rate of 35 per­cent, save $70 mil­lion in taxes. (Since that money could have been con­sid­ered tax­able busi­ness in­come if it hadn't been doled out to em­ploy­ees.)

If the com­pany had booked the ex­pense in 2018, it would have only been able to save $42 mil­lion. AT&T de­clined to com­ment on when it will ac­count for the bonus de­duc­tion.

While the tax-sav­ings boost will be greater for smaller com­pa­nies com­pared to large multi­na­tion­als with tens of bil­lions of dol­lars of an­nual in­come, it could still be sig­nif­i­cant, tax ex­perts say.

"Th­ese big bonuses will re­duce in­come for the rel­e­vant year, which will lower the ef­fec­tive rate for that year," said James Howard, chair of the tax depart­ment at law firm Gardere Wynne Sewell.

Keep in mind that com­pa­nies can't deduct all of their com­pen­sa­tion-re­lated ex­penses. A pro­vi­sion in the Repub­li­can tax bill passed by Con­gress in De­cem­ber elim­i­nates cor­po­rate de­duc­tions for per­for­mance-re­lated pay and com­mis­sions in ex­cess of $1 mil­lion to in­di­vid­ual ex­ec­u­tives.

When, how and why

It's hard to know when the com­pa­nies that have an­nounced bonus pay­outs plan to ac­count for them. More than half of com­pa­nies in the S&P 500 In­dex have re­ported their ful­lyear 2017 earn­ings, but those that an­nounced bonuses didn't nec­es­sar­ily dis­close whether they ac­crued the ex­pense last year. Many will likely try to struc­ture the pay­outs so they qual­ify for a de­duc­tion un­der the 35 per­cent rate, ac­cord­ing to Louis We­ber, chair of the tax prac­tice at Win­ston & Strawn.

Most large com­pa­nies use an ac­count­ing method that records when an ex­pense is in­curred but not yet paid out. Un­der that method, if they want to ac­count for the payout as a 2017 ex­pense, they must dis­trib­ute the bonuses within two and a half months af­ter their fi­nan­cial year ends, ac­cord­ing to El­liot Freier, a tax part­ner at Irell & Manella. For com­pa­nies that fol­low the cal­en­dar year, that means pay­outs must be doled out by March 15; com­pa­nies whose 2017 fis­cal years end af­ter Dec. 31 will have more time.

Not all com­pa­nies are book­ing their bonus pay­outs as 2017 ex­penses. Wal­mart, the na­tion's largest pri­vate em­ployer, said Jan. 11 that it would spend an ad­di­tional $700 mil­lion on wage in­creases and spe­cial bonuses for el­i­gi­ble em­ploy­ees. The re­tailer isn't ac­count­ing for that charge in 2017, ac­cord­ing to Randy Har­grove, a Wal­mart spokesman.

If it had, Wal­mart could have saved $245 mil­lion. In­stead, the $700 mil­lion de­duc­tion at the 21 per­cent rate will equal tax sav­ings of $147 mil­lion.

Since Repub­li­can lead­ers pushed through their tax over­haul, more than 330 com­pa­nies have an­nounced bonuses, pay raises, profit-shar­ing and stock awards, and in­creased 401(k) con­tri­bu­tions for their em­ploy­ees, ac­cord­ing to Amer­i­cans for Tax Re­form, run by the anti-tax ac­tivist Grover Norquist. There are re­stric­tions on some of the pay­outs, such as the max­i­mum bonus amount only go­ing to em­ploy­ees who have worked at the com­pany for a cer­tain pe­riod of time.

"One ad­van­tage of bonuses rel­a­tive to in­creas­ing wages is that if the econ­omy slows down, they can just cut the bonuses and have no com­mit­ment to higher wages," said Bur­man of the Tax Pol­icy Cen­ter.

Trump and Repub­li­can law­mak­ers have high­lighted the cor­po­rate an­nounce­ments as ev­i­dence that their cuts are work­ing and mid­dle-class Amer­i­cans are ben­e­fit­ing. Democrats have called the pay­outs "crumbs" rel­a­tive to the bil­lions of dol­lars in sav­ings for cor­po­rate Amer­ica un­der the new tax plan.

"With 3.5 mil­lion Amer­i­cans re­ceiv­ing bonuses or other ben­e­fits from their em­ploy­ers as a re­sult of TAX CUTS, 2018 is off to great start!" Trump tweeted on Feb. 2.

Alan Viard, a tax and bud­get pol­icy ex­pert at the con­ser­va­tive Amer­i­can En­ter­prise In­sti­tute, says it's too soon for the tax cuts to have trig­gered com­pa­nies to build up more cap­i­tal and work­ers to in­crease their pro­duc­tiv­ity — spurring bonus pay­outs.

In­stead, the tight la­bor mar­ket, which puts pres­sure on com­pa­nies to pay and re­ward their work­ers more, is more likely mo­ti­vat­ing the an­nounce­ments rather than the tax code re­vamp, said Adam Halpern, chair of the tax group at Fen­wick & West. An­other pos­si­bil­ity, he said: the de­sire to curry fa­vor with the Trump ad­min­is­tra­tion.

"Com­pa­nies don't just dole out bonuses out of the good­ness of their hearts," said Christo­pher Rup­key, the chief fi­nan­cial econ­o­mist at MUFG Union Bank.


Em­ploy­ees re­stock shelves of school sup­plies at a Wal­mart lo­ca­tion in Bur­bank, Cal­i­for­nia.

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