Please ensure Javascript is enabled for purposes of website accessibility

For Bank of America, There's a Downside to Trump's Tax Plan

By John Maxfield - Apr 27, 2017 at 7:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While lower corporate income taxes will be good for Bank of America over the long run, a tax cut would nevertheless cause short-term pain.

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.

Bank of America Tower in New York City.

Bank of America Tower (center) in New York City. Image source: Getty Images.

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.

Scissors cutting through the word "taxes."

Image source: Getty Images.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$30.98 (-0.83%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.