In the latest report from the Georgia Tech Financial Analysis Lab, located in the College of Management, accounting professor Charles Mulford warns of increased tax payment risks to capital-intensive companies. He identifies companies that may be facing increased taxes from a reduction in capital spending that may arise from the slowing economy.

According to the report, firms that reduce their capital spending could see increased tax payments.

Mulford says the situation is part of the consequences of deferred tax liabilities. The risks occur when capital expenditures are reduced, resulting in reductions in deferred tax liabilities. Income taxes, which were deferred in previous periods, come due, resulting in higher tax payments.

Such increased tax payments may occur during difficult economic times as companies respond to slack demand by reducing capital spending.

“Cash flow is the lifeblood of any company,” says Mulford. “During a recession, investors and creditors become understandably concerned about the ability of companies to generate cash. Unexpected increases in tax payments, which can arise as companies reduce their capital spending, can threaten cash flow and hurt corporate financial well being.”

The lab conducted research using 2007 data to identify capital-intensive firms with significant deferred tax liabilities. The report then splits these firms into two groups: firms with increasing capital expenditures and deferred tax liabilities, and firms with decreasing capital expenditures and deferred tax liabilities.

According to Mulford, all of the firms could be at risk for increased tax payments during an extended period of reduced capital expenditures. However, the firms in the latter group are more likely to have higher tax payments. Investors may not be expecting such high tax payments, especially during a recession.