The outline of Donald Trump's proposed tax plan, released by the White House on Wednesday, bodes well for Bank of America (BAC -0.83%).
The nation's second biggest bank by assets paid $7.3 billion in corporate income taxes in 2016 at an effective tax rate of 29%. If Trump's plan to lower the rate on corporations to 15% comes to fruition, Bank of America could redirect billions of dollars to dividends and share buybacks, both of which the North Carolina-based bank is inclined to do.
According to my math, Bank of America's tax liability would be cut nearly in half under the White House's proposed plan. It would have shaved approximately $3.5 billion off its tax bill last year, which, holding all else equal, would have equated to a roughly 19% increase in Bank of America's bottom line.
But as with most good things, there's a catch. Bank of America currently has $19 billion worth of net deferred tax assets sitting on its balance sheet. These stem from, among other things, past net operating losses the bank hasn't been able to claim yet, as well as tax credit carry-forwards that can be used to reduce its future tax liability.
The catch is that the value of these assets is correlated to the corporate income-tax rate. If rates are lowered, so, too, will the value of Bank of America's deferred tax assets.
Under a high tax rate, deferred tax assets are more valuable because there's more tax to offset. Because these assets expire after a set number of years, moreover, it's also possible that a lower tax rate would leave a portion of Bank of America's $19 billion net deferred tax assets unused. At a 15% rate, it wouldn't be able to claim the entire amount before the expiration date.
Bank of America hasn't said how much a lower tax rate would affect the value of its deferred tax assets, noting in its latest 10-K:
Policymakers have indicated an interest in reforming the U.S. corporate income tax code in 2017. Possible approaches include lowering the 35% corporate tax rate, modifying the U.S. taxation of income earned outside the U.S., and limiting or eliminating various deductions, tax credits, and/or other tax preferences. It is not possible at this time to quantify either the one-time impacts from the remeasurement of deferred tax assets and liabilities that might result upon tax reform enactment or the ongoing impacts reform proposals might have on income tax expense.
Bank of America's stance aside, estimates put the figure at $4.4 billion, which would presumably be realized by the $2.2 trillion bank over the course of a year.
A write-down this big obviously makes a tax cut less attractive from Bank of America's perspective. Yet it would still be a boon to the bank, as it would shave billions of dollars off its annual tax liability on an ongoing basis.