Adding Clarity to Bank of America's 2010 Tax Expense

By Trefis Team,

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Bank of America ( BAC ) incurred income tax expense of $915 million in the year 2010, the lowest among large U.S. banks like JPMorgan Chase ( JPM ), Goldman Sachs ( GS ), Morgan Stanley ( MS ) and Wells Fargo ( WFC ). JPMorgan, for example, paid a total income tax of about $7.5 billion in 2010.

We have a price estimate of $15.42 for Bank of America's stock , about 10-15% above the current market price.

Bank of America's Income Tax Expense Turning Heads

In 2010, Bank of America's total income tax expense was $915 million, on a loss of about $1.3 billion. In 2009, Bank of America had a total income tax benefit of $1.9 billion on a net income of $4.3 billion; and in 2008, the bank had income tax expense of $420 million on a total income of $4.4 billion.

Some sources suggest a sentiment that Bank of America is avoiding income taxes, but it is important to note the different components that go into the income tax calculation for corporations like BofA.

Major components of a corporation's income tax expense, apart from U.S federal income tax, include state tax expense, non-U.S. corporate tax differential, changes in the federal deferred tax assets and certain tax-exemptions. Thus, while Bank of America incurred current U.S. federal income tax expense of $1.55 billion, $1.53 billion and -$463 million in 2008, 2009 and 2010 respectively, its effect on the company's total income tax expense is diluted when other components are taken into account.

Effective Tax Rate Outlook for BofA

We expect Bank of America's effective tax rate to remain at about 31% throughout our forecast period, slightly lower than its 2006 high of about 34% due to its high deferred tax assets of 27 billion. Notably, value of Bank of America's stock is quite sensitive to the effective tax rate by our estimates. A drop in the effective tax rate by 3 percentage points, for example, implies a 7% increase in our $15.42 price estimate for Bank of America's stock. You can test this scenario, and others, by dragging the trend line in the interactive chart above.

See our complete analysis for Bank of America stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: BAC , GS , JPM , MS , WFC

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