The House Ways and Means Committee held a hearing on the interaction of tax and financial accounting rules on tax reform.

Dave Camp

“When companies report profits in their financial statements, the primary purpose is to convey information about a company’s financial condition to investors and creditors,” said House Ways and Means Committee Chairman Dave Camp, R-Mich., in his opening statement Wednesday. “Conversely, the primary purpose of tax accounting is to measure income for levying the federal income tax. These two functions are not necessarily consistent, and in some cases, may even be at odds. For publicly traded companies focused on earnings per share in addition to cash flows, changes in tax policy might not produce intended results if the effect of tax policy on EPS is not well understood.”

He noted that properly designing tax reform requires an understanding of the financial accounting rules and how those rules might influence the investment decisions of public companies.

Rep. Sander Levin, D-Mich., the ranking Democrat on the committee, expressed his frustration about the inability to strengthen provisions such as the research and development tax credit and accelerated depreciation. “The chairman and I for years have tried to strengthen the R&D tax credit and here we are many months into this new session and the R&D tax credit seems to be in jeopardy,” he said.

Other witnesses also supported provisions that allow for acclerated depreciation. FedEx corporate vice president of tax Michael D. Fryt backed provisions that allow accelerated depreciation. “From a macro-economic standpoint, strong capital cost incentives, like expensing, generate new investment in new productive property, plant and equipment in the U.S.,” he said. “This, in turn, creates jobs.”

“Given the capital intensity of our business, however, we rely even more on timing incentives that do not impact GAAP financial reporting, such as expensing or accelerated depreciation, which significantly enhance out actual cash flows and ability to invest in people, technology and network infrastructure,” said Mark A. Schichtel, senior vice president and chief tax officer, Time Warner Cable.

“Shortening the capital recovery period of a U.S. project improves the company’s cash flow and makes new domestic investments much more attractive,” said Timothy S. Heenan, vice president of treasury and tax at Praxair. “Better cash flow means more U.S. investment… A lower tax rate will benefit cash flow, but in promoting investment, accelerated depreciation is perhaps a more powerful too than lower overall tax rates. This is because lower tax rates reward both old and new investment – whereas accelerated depreciation is targeted by only rewarding new investment, which is precisely what we need to restore our competitiveness and economic strength.”