Each year, publicly traded corporations prepare two sets of books. The first is a basic quarterly profit and loss statement that is widely disseminated to shareholders, analysts and the media.
The second is the firm’s annual corporate tax filing, submitted to Uncle Sam. It includes a statement of the year’s profits, on which tax obligations are owed to the government -- if any.
The differences between these two reports can be very different. For companies such as Apple Inc. and Amazon.com Inc., these two numbers can vary by tens of billions of dollars.
It isn't that either of these numbers are false; but rather, they are more like opinions prepared using very different standards. Quarterly earnings use generally accepted accounting principles. These accounting rules have been adopted by the Securities and Exchange Commission (SEC) as acceptable legal guidelines for reporting earnings. For corporate taxes, the rulebook is the Internal Revenue Service guidelines, which look nothing like GAAP. For example, depreciation expenses are part of corporate overhead -- affecting profits like any other spending would -- but its impact can dramatically reduce what is owed in taxes. Similar issues arise with other aspects of corporate profitability, such as stock options, fringe benefits and debt servicing.
The gap between reported profits and taxes owed appears to have grown even larger, in part due to the Trump tax cuts of 2017. One of the modifications that affected the gap was the repeal of the corporate alternative minimum tax.
This isn't the sort of wonky issue that usually attracts much attention. But in this case it is prime fodder for political and policy gaming. Along with the tax cut, a few other things are stirring the debate. These include:
• The declining corporate share of total federal tax revenue;
• Growing wealth and income inequality;
• Discussions on reforming capitalism from Ray Dalio, Jamie Dimon and others;
• The 2020 presidential election