Yelp (YELP) experienced a significant boost in third-quarter profits, not solely from its core operations but due to a one-time tax adjustment. This windfall was triggered by new IRS guidance regarding deductions for research and development expenditures. Initially, Yelp had faced the prospect of a substantial tax increase due to a 2017 tax law requiring companies to amortize R&D costs over several years. This change had led to Yelp's effective tax rate forecast jumping from 18% in 2019 to an expected 32%-38% for 2023. However, with the recent IRS clarifications, Yelp now projects a lower effective tax rate of 22%-26% for the year.
The third-quarter profit leaped to $58 million, a 539% increase, buoyed by the $15 million from the one-time tax adjustment. In comparison, net income in the same quarter last year had nearly halved to $9.1 million. Yelp's CFO, David Schwarzbach, acknowledged that despite the clarification easing the effective tax rate, the company still faces higher cash taxes due to the law. He emphasized the increased costs of investing in R&D under the new regime, which could impact the company's ability to stay competitive in the long term.
Yelp's situation illustrates a broader issue faced by many companies following the enactment of the 2017 Tax Cuts and Jobs Act. This legislation shifted the treatment of R&D expenses from immediate deductions to long-term amortization, effectively raising near-term tax liabilities for businesses. The delay in Congress' expected reversal of this provision has left companies like Yelp navigating an uncertain tax landscape, despite bipartisan agreement on the need for change.
Despite the one-off nature of Yelp's earnings surge and ongoing R&D investment costs, analysts like Shweta Khajuria from Evercore (EVR) ISI believe the company's growth trajectory should remain unaffected as long as the business fundamentals remain strong. The tech industry and other sectors are closely watching Congress for a resolution that could ease the financial burden imposed by the 2017 tax law changes.
