Introduction
When the Tax Cuts and Jobs Act was signed on December 22, 2017, cutting the US corporate rate from 35% to 21%, Berkshire Hathaway's net worth rose by about $29 billion in a matter of days. Of the company's $65.3 billion gain in net worth that year, Warren Buffett told shareholders in his 2017 letter, only $36 billion came from its operations. Citigroup, reporting the same quarter under the same law, recorded a non-cash charge of $22.6 billion, enough to turn its fourth quarter into a large loss.
Neither company's business changed that December. What changed was the value of their deferred taxes. Berkshire carried large deferred tax liabilities, mostly on unrealized gains in its stock portfolio and on accelerated depreciation in its railroad and utilities, which became smaller when the rate at which they would be paid fell. Both kinds of balance exist because book and taxable income recognize items in different years, as explained in book vs tax accounting. Citigroup carried large deferred tax assets, from past losses and credits, which became less valuable for the same reason.
Why Deferred Taxes Are Remeasured
Deferred tax assets and liabilities are measured at the enacted tax rates expected to apply when the underlying temporary differences reverse, as explained in deferred tax liabilities. When the law changes, the expected future tax changes, so every balance must be remeasured. Accounting Standards Codification (ASC) 740 requires the effect to be recognized in the period that includes the enactment date, the date the law is signed, not the date it takes effect, and to be recorded in income tax expense from continuing operations.
- Enactment date
For US federal tax law, the date the President signs a bill into law. Under ASC 740, the effects of a change in tax law or rates on deferred tax assets and liabilities are recognized as of that date, even if the change applies only to later tax years.
Suppose a company has $1,000 of taxable temporary differences, mainly accelerated depreciation, and the tax rate falls from 35% to 21%. Its deferred tax liability falls from $350 to $210:
The $140 benefit is recognized at once, in the quarter of enactment, as a reduction in income tax expense. No cash moves, but the company will pay $140 less tax when the differences reverse, so the gain is economically real. A company with $1,000 of deductible temporary differences and carryforwards faces the mirror image: its deferred tax asset falls from $350 to $210, and it records a $140 charge.
Phased Rates, State Laws and Proposals
When a law changes rates in stages, each deferred balance is measured at the rate enacted for the year in which it is expected to reverse, so a company may need to schedule its reversals year by year. State tax changes work the same way, and so do shifts in where a company earns its income: a change in the mix of states changes the blended state rate at which deferred taxes are measured, and the remeasurement runs through tax expense.
Proposed changes have no accounting effect until they are enacted, however likely they seem. If a law is signed after the balance sheet date but before the financial statements are issued, the change is not recorded in those statements; it is disclosed as a subsequent event, with its estimated effect where it is material, and recorded in the period that includes the enactment date.
Quarterly Reporting and Provisional Amounts
In interim reporting, the remeasurement of deferred tax balances is a discrete item in the quarter of enactment rather than an adjustment to the estimated annual tax rate, so it lands whole in one quarter. The law's effect on the current year's tax bill works differently: it enters the estimated annual rate from the quarter of enactment onward. Because the 2017 act was signed just days before most companies' year-ends, the staff of the Securities and Exchange Commission allowed a measurement period of up to a year, under Staff Accounting Bulletin 118, for companies to record provisional amounts and refine them. Citigroup treated about $16.4 billion of its charge as provisional and completed its accounting in the fourth quarter of 2018.
Items Originally Recorded in Equity
Some deferred taxes relate to items recorded in other comprehensive income, such as unrealized gains on available-for-sale debt securities or pension adjustments. Even so, the remeasurement goes through income from continuing operations, not back through other comprehensive income. The deferred tax at the old rate is left behind in accumulated other comprehensive income, the "stranded" tax effect. After the 2017 act, the Financial Accounting Standards Board issued Accounting Standards Update 2018-02, allowing companies to reclassify those stranded effects to retained earnings, as Deloitte's tax reform FAQ discusses. The mechanics of the comprehensive income account are covered in other comprehensive income.
More Than Rate Changes
A rate change is the clearest case, but any change in law that alters future taxes can force deferred taxes to be revisited. Citigroup's $22.6 billion charge, as broken down in its later annual report, had three parts:
- $12.4 billion from remeasuring its deferred tax assets for the lower rate and the move to a partly territorial tax system.
- $7.9 billion of valuation allowances against foreign tax credit carryforwards and US deferred tax assets of its non-US branches, which the new law made harder to use.
- $2.3 billion from a reduction in foreign tax credit carryforwards tied to the one-time tax on accumulated foreign earnings.
Only the first was a remeasurement for the new rate, and even it included the shift toward exempting foreign income. The others came from changes in how the law treated foreign income, which changed how much of Citigroup's existing tax attributes it expected to use. The same can happen without any change in the rate. Meta recorded a $15.93 billion charge as of the July 4, 2025 enactment date of the One Big Beautiful Bill Act, including a valuation allowance on its US federal deferred tax assets. As its quarterly report explains, the law's faster deductions are limited by the corporate minimum tax, which changed Meta's expected ability to use those assets, a judgment covered in deferred tax assets and valuation allowances. Later guidance can change the answer again: after Treasury's Notice 2026-7 let companies reduce the minimum tax base by their catch-up research deductions, Meta reversed $8.03 billion of the charge in the first quarter of 2026.
What Bankers Do With Law-Change Effects
For earnings analysis, remeasurement gains and charges are excluded from adjusted net income and from the normalized tax rate: they arise once, from the law, not from operations. The forward-looking effect is what matters. A rate cut lowers the tax rate in every future year's forecast, and a change in deductions, such as the restoration of full expensing for equipment in 2025, changes cash taxes for years.
Balance sheet effects can matter as much. For banks and insurers, deferred tax assets count partly toward regulatory capital, so a charge on them can reduce capital ratios, though by less than the accounting charge: Citigroup's 2017 annual report put the reduction in its common equity tier 1 capital at about $6 billion. For companies with debt covenants tied to net worth, a large charge can also tighten headroom.
Changes in international tax rules raise the same questions at a global scale. The global minimum tax developed through the Organisation for Economic Co-operation and Development, now in force in many countries, changes the tax on low-taxed foreign income and has its own accounting, covered in the global minimum tax in the financial statements.
