We use the Tax Cuts and Jobs Act as a setting to offer new insights into companies’ tax accruals. We examine companies’ estimates of the mandatory one-time transition tax on previously untaxed foreign earnings. We exploit the one-year measurement period provided by SAB 118 during which companies could adjust their initial transition tax estimates to examine how companies’ information gathering and processing costs affect these estimates. We find more accurate initial estimates for companies (1) with political access, (2) with less busy financial statement auditors, and (3) who previously accrued estimated incremental U.S. tax on foreign earnings. Finally, we find companies with incentives to manage external perceptions that they pay their “fair share” of tax are more likely to overstate their initial transition tax estimates. Our study provides evidence of cross-sectional differences in companies’ financial reporting of income taxes during a politically sensitive time.
Companies’ Initial Estimates of the One-Time Transition Tax Imposed by the Tax Cuts and Jobs Act
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Shannon Chen, Matthew Erickson, Michelle Harding, Bridget Stomberg, Junwei Xia; Companies’ Initial Estimates of the One-Time Transition Tax Imposed by the Tax Cuts and Jobs Act. Journal of the American Taxation Association 2022; https://doi.org/10.2308/JATA-2021-021
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