Why New Tax Law Cost Citigroup, GM $29 Billion

Two of America's biggest companies -- Citigroup Inc. and General Motors Co. -- announced a combined $29 billion charge against earnings Tuesday due to the new tax law.

Similar issues will likely ensnare other firms in coming days, even if the numbers aren't as big.

Citigroup took a $19 billion charge to write down so-called deferred tax assets, akin to IOUs that can be used to pay future tax bills, when it announced fourth-quarter earnings Tuesday. That accounted for the lion's share of $22 billion in charges it recorded because of the tax overhaul enacted last month.

GM said at a conference Tuesday that it would take a charge of about $7 billion for the same reason when it reports its fourth-quarter results Feb. 6.

The primary reason for the charges is something that will benefit the companies in the long run: The tax law's reduction in the U.S. corporate tax rate to 21% from the old 35% rate.

Deferred tax assets are past tax credits and deductions that companies can hold on to and use to defray future tax bills. But when the tax rate declines, companies' tax bills shrink.

Many of those credits and deductions become less valuable. This is because it will require a lot more profit to use them up and that will likely occur over a longer period than originally thought.

In that case, companies must write down their deferred tax assets, leading to charges against earnings.

Such assets often result from past losses. Citigroup and GM racked up lots of those in the financial crisis and now have big piles of deferred tax assets. Citigroup had $45.5 billion as of Sept. 30; GM had $30.1 billion.

Still, the companies emphasized that the lower tax rate will ultimately help them. "On balance, tax reform is a clear net positive for Citi and its shareholders," Michael Corbat, Citigroup's chief executive, said during the bank's earnings conference call.

The charges from deferred tax assets have other effects on a company's finances beyond the immediate hit to profit: They cut into a company's book value -- its net worth. That can prove troubling to investors, although the pain can be assuaged by the thought that the lower tax rate will lead to more profit for shareholders in the future.

For banks, there is an added concern: a reduction in book value can also cut into measures of regulatory capital, or the buffers they are required to hold to absorb losses. If that falls too low, regulators could curb a bank's dividend payouts or share buybacks.

Citigroup said Tuesday that its charge on deferred tax assets and other effects from tax reform sliced $6 billion off one important capital measure known as its Tier 1 common equity. Even so, the bank stressed that it still well exceeds regulatory benchmarks and is committed to continuing with plans to return capital to shareholders.

The bank also said that it was taking a $3 billion, one-time charge related to profits held overseas.

Citigroup and GM may be among the biggest examples of the short-term pain brought about by the new tax law, but they won't be the only ones. Other companies reporting fourth-quarter results in coming weeks also are expected to take write-downs.

For instance, Bank of America Corp., which reports earnings Wednesday, has already said it expects a $3 billion charge.

American International Group Inc. said in November that it could see a reduction of about $7 billion in the value of its deferred tax assets from a lowering of the tax rate. The company, which had $20.7 billion in deferred tax assets as of the end of 2016, reports fourth-quarter earnings Feb. 8. An AIG spokeswoman declined to comment further Tuesday.

Conversely, companies that have net deferred tax liabilities, or taxes payable in the future, may record gains. That is because those liabilities will now be worth less as well. Wells Fargo & Co., which was in that position, had a gain of $3.9 billion when it reported earnings last Friday.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

(END) Dow Jones Newswires

January 16, 2018 15:07 ET (20:07 GMT)