H&R Block Falls Most Ever as Simpler Tax Code Weakens Forecast

(Bloomberg) -- Not all corporations are happy about President Donald Trump’s tax overhaul: H&R Block Inc. shares plunged after an earnings call revealed that one of the main provisions in the law could limit how much the tax adviser charges customers.

H&R Block dropped as much as 21 percent on Wednesday -- the most ever -- after its sales forecast disappointed. Management said it expects 2019 revenue of $3.05 billion to $3.1 billion. The average analyst estimate for the period was $3.14 billion.

Trump’s overhaul slashed the corporate tax rate to 21 percent from 35 percent. But for H&R Block, the provision in the law that doubles the standard deduction for individual taxpayers could ultimately hurt its business. The number of U.S. tax returns H&R Block prepared increased by 2.5 percent last year compared to the prior year, but its pricing is contingent upon the complexity of the filing.

The tax overhaul is expected to sharply reduce the number of Americans who tend to have more complicated returns because they itemize their deductions. That’s because the law doubles the standard deduction to $12,000 for single filers and $24,000 for couples, while also eliminating or limiting deductions. Employees can no longer deduct unreimbursed work expenses, such as union dues, travel expenses, and home offices. Deductions for state and local taxes are capped at $10,000.

“We do price on complexity and there are certain clients that because of the standard deduction change mainly would have been paying a lower price,” H&R Block Chief Executive Officer Jeffrey Jones told analysts Tuesday. “We took that into account thinking about our overall pricing approach to the upcoming season.”

Bleak Guidance

Most of the new law’s provisions took effect on Jan. 1, but most taxpayers won’t notice until they file their returns in early 2019.

The bleak sales guidance is a sign that a simpler tax code has taken a “bite out of the company’s future prospects,” said BTIG analyst Mark Palmer.

Still, Republican lawmakers fell short of their goal of simplifying the tax code so that every American could file on a postcard. Filing taxes could get more complicated for some, especially upper-income Americans trying to qualify for a new deduction for pass-through business owners. But those taxpayers generally don’t use H&R Block’s tax preparation help.

Most of H&R Block’s revenue comes from offering one-on-one tax preparation assistance. While software like Turbotax, owned by Intuit Inc., makes it possible to do taxes at home, most Americans still turn to a professional at tax time. This year, according to Internal Revenue Service statistics, 57 percent of e-filed tax returns have come through tax professionals.

Despite the tax overhaul, “we definitely still see viability and growth in the assisted tax preparation business,” Jones said, adding that the vast majority of Americans already take the standard deduction.

The White House Council of Economic Advisers estimated in November that doubling the standard deduction amounts would prompt the share of itemizers to drop to 8 percent, from 26 percent.

H&R Block shares had increased 13 percent this year through Tuesday’s close. Despite the rally, company insiders hadn’t sold on strength. Management and board members haven’t disposed of any shares in 2018.

The Kansas City, Missouri based company’s stock had been one of the most shorted in the S&P 500 Index through the end of May. Short interest as a percent of equity float was 11.17 percent, the 26th highest value among the benchmark index’s members.

©2018 Bloomberg L.P.

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