Tax Gimmick Accounts for Most of 1st Quarter S&P 500 6.7% Earnings Growth

A 25-year-old research-and-development tax credit that expired at the end of 2011 was extended by Congress at the start of 2013 serving to lift the profits for many firms in the S&P 500 by over 10%. While top-line revenue growth was negligible, earnings grew at a robust rate of 6.7% thanks, as the Wall Street Journal notes, in large part to this tax-credit’s ‘accounting’ gains. This stock-market-saving tax-gimmick, however, is only for big corporate America since small firms aren’t profitable enough to get the credit. Looking ahead, however, the unusual benefit from extension of the tax credit won’t help corporate profits for the rest of this year as it is set to expire at the end of this year (having cost taxpayers over $7 billion).

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%. The S&P 500 companies also set aside 5.6% less money for taxes via tax accruals. Note that if Intel Corporation’s profits had been taxed at last year’s rate, it would have had to set aside an additional $290 million.

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Q113 earnings reporting season began when Alcoa reporting on April 8th and by May 10th more than 90% of the S&P 500 had reported ‘inflated’ results. Generally unaware of the accounting gimmickry, could the market be duped? Not coincidentally, the Dow Jones Industrial Average (chart shown below) notched its high just two weeks later on the heels of misguided security analyst optimism, recommendations and upgrades.  Here at Christine Meder’s Accounting Advisory Services I am advising clients to reduce their exposure to the equity markets based on the unwarranted optimism.

For an additional insight on how my accounting analysis can lead to valuable equity recommendations, please refer to my blog on the topic of goodwill (https://christinemederaccountingadvisory.wordpress.com/2013/06/09/beware-goodwill-2/).  If you’d like additional clarity into your specific equity holdings and the market in general, please contact me at mederchristine1526@gmail.com to schedule a free 30 minute consultation or tweet me at @christinemeder1.

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

2 Responses to Tax Gimmick Accounts for Most of 1st Quarter S&P 500 6.72 Earnings Growth

  1. Pingback: Truth Behind 1Q 2013 Earnings and What’s Next for Stocks

    • P/E ratio’s continue to rise as equity prices rise and fundamentals don’t keep pace. The day of reckoning for the bulls will indeed come and it will be harsh… but the markets will likely ramp higher first. A lot of short-sellers have had their heads handed to them as a result of this price rally on low volume.

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