Goldman Sachs expects $5 billion hit from tax overhaul in 4Q
Goldman Sachs expects to take a $5 billion hit to profits for the fourth quarter and year because of the tax overhaul signed into law last week.
As a result, the New York bank will likely report a loss for the last quarter of 2017. But Goldman and other banks will be among the largest beneficiaries of the new tax code.
Goldman on Friday became one of the first companies to release details on how changes in the tax code will affect how money parked overseas is handled. The bank said two-thirds of the $5 billion is related to changes in repatriation taxes, when funds are returned from overseas.
The new tax overhaul imposes a discounted one-time levy on overseas money returned to the U.S. — 15.5 percent for earnings held in cash or other liquid assets and 8 percent for earnings held in harder-to-sell assets. Previously, companies had to pay a 35 percent corporate tax when they returned that money, so they left it parked overseas.
It has been expected that changes in the law would prompt many companies to return money to the U.S., potentially $2.5 trillion or more. Keefe Bruyette & Woods analyst Brian Kleinhanzl estimated that the repatriation part of Goldman's charge equates to an 11 percent tax rate, based on the $32.6 billion in undistributed foreign earnings Goldman had at the end of 2016.
Goldman had been expected to post fourth-quarter net income of $2.07 billion, according to banking analysts polled by FactSet. The bank reports earnings in mid-January.
After taking a hit on repatriated earns, Goldman, and other banks, will operate in a much more favorable tax environment.
The tax measure signed into law by President Donald Trump this month spreads benefits across a wide array of American industry, including banks.
Finance and insurance companies would have paid an effective corporate tax rate of 26.1 percent next year. Now, it will be 14.3 percent. Analysts at Goldman Sachs have estimated that the tax law will boost big-bank earnings per share by 13 percent next year. The top beneficiary will be Wells Fargo, which has been dogged by scandals over cheating customers. It will enjoy an 18 percent earnings surge in 2018, Goldman estimates.
Economists believe the overall effect on the economy will be muted, however, because of those cuts to the U.S. corporate tax rate.
Historically, repatriated profits have not had a broad effect on the U.S. economy anyway.
A 2004 law temporarily cut taxes on repatriated profits to 5.25 percent, from 35 percent. That led 843 companies to bring back $312 billion. But those companies tended to use the money to buy back shares of their own stock, not to hire or expand operations.
Goldman also said part of the reduction to fourth-quarter earnings comes from recalculating the value of it deferred tax assets. Those are past losses that companies can use to lower future tax bills. Goldman and other banks suffered huge losses during the financial crisis. Those assets will now have less value because of the lower corporate tax rate.
The effect of the tax changes on Goldman Sachs was revealed in a filing with the U.S. Securities and Exchange Commission early on Friday.
The company did not say how changes in the tax law would affect its decisions on investments going forward, and did not immediately return messages left early Friday.
Shares of Goldman Sachs Group Inc. fell 1 percent to $254 in early trading.