Friday, June 14, 2013

How the R&D Tax Credit is Driving S&P 500 Earnings

S&P 500 because as one interviewee put it:
Within those industries, said Nirupama Rao, an economics professor at New York University, the bulk of the credits are claimed by the largest companies. "It's big corporate America," Ms. Rao said of the beneficiaries. "Small firms aren't profitable enough to get the credit."
Serious analysis from Dow Jones.
From the Wall Street Journal:
Behind the Big Profits: A Research Tax Break 
Strong first-quarter corporate profits may not be quite as good as they look.

An analysis by The Wall Street Journal shows that the extension of a big tax credit quietly boosted the profits of dozens of companies. Under accounting rules, the companies reported a year's worth of benefits from the research-and-development tax credit in their first-quarter results, lifting profits for many of them by more than 10%.

With first-quarter results nearly complete, 465 participants in the Standard & Poor's 500-stock index cumulatively reported that revenue increased 2.1% from the same period a year earlier. Expenses grew slightly faster, so pretax profit rose only 0.9%, according to the Journal's analysis.

But the S&P-500 companies also set aside 5.6% less money for taxes, and that helped their cumulative profits grow a robust 6.7%, the Journal found.

The biggest reason they took that action: the extension of the research credit and other tax breaks in January, said Jeffrey Hoopes, a lecturer in accounting at Ohio State University whose recent doctoral dissertation examined the issue.

For some companies, the effect was dramatic. Internet giant Google Inc. GOOG +0.10% reported spending $6.8 billion on research and development in 2012, making it one of the nation's biggest corporate research spenders.

The company set aside less than half as much money for first-quarter taxes as it did a year earlier even as its pretax income increased 2%, to $3.6 billion. Its effective tax rate fell to 7.9% from 18.5%. In a securities filing, Google said the drop was "primarily" due to the extension of the tax credit. If Google's profit had been taxed at the same rate as last year, the company would have had to set aside an additional $380 million for income taxes....MUCH MORE