How Much Did This Tax Credit Boost Corporate Earnings?
Few people would argue that the most hated stock rally in history has received a great deal of help from the Federal Reserve. The equity bears say the rally will soon stall out, while bulls counter with corporate profits, which are at all-time highs. Either way, the next earnings season will exclude the help of a major tax credit.
Due to the U.S. tax code being longer than 70,000 pages, new corporate perks are made public seemingly every other week. The Wall Street Journal recently completed an analysis that finds first-quarter profits were boosted by a research-and-development tax credit, which allowed well-known companies to legally report a year’s worth of R&D benefits in one quarter.
The tax credit benefits companies by more than $7 billion each year, according to estimates from the Senate Finance Committee. It is not a permanent part of the tax code, but it started in 1981 and has been extended 15 times.
For the first quarter, 465 companies in the S&P 500 cumulatively reported that revenue grew only 2.1 percent, compared to a year earlier. However, the research tax credit helped those companies set aside 5.6 percent less money for taxes, and grow their cumulative profits by 6.7 percent, according to the WSJ. Technology and pharmaceutical companies benefitted most from the credit.
Here’s a look at the five biggest beneficiaries of the R&D tax credit.