VideoBut report co-author Christopher Cornett, a Credit Suisse equity analyst, warns against overstating the rule's impact on company valuations. "When the rule change was announced, a lot of people thought this was a dollar-for-dollar increase in the enterprise value of a company. It is not." Cornett explains that the real benefit of the tax change is having the cash today, versus having to wait for the company to start generating profits again before claiming an NOL refund in the future.
He says the immediate cash infusion may help reduce uncertainty among companies currently suffering from liquidity problems. Indeed, a better cash position could lower the market's perception of risk and, in turn, increase a company's valuation.
Taxing Decisions
The IRS has made filing for the refund easy, saying firms can make a claim on their tax return for the NOL year, amend prior returns, or file a "quick" carryback claim. But companies still face two complicated, if basic, questions: Which year's NOL should they carry back, and how far back should they carry it?
Mulling over different NOL-carryback scenarios to determine "the ancillary effects" on a company's other tax positions is a complex matter, says Paul Manning, a principal in KPMG's tax practice. For instance, if a company carries back a loss to a year in which foreign tax credits were used — and the carryback wipes out the taxable income for that year — the company may want to elect to deduct foreign taxes for that year, rather than taking a credit, depending on its particular situation.
The five-year carryback provision also may affect a company's ability to use general business credits, such as the research-and-development credit or the work-opportunity credit (used to encourage companies to hire veterans or young persons not enrolled in school).
Another area to consider is Section 199 of the tax code, which permits a deduction for a small percentage of income generated by manufacturing activities. But the deduction isn't allowed to create or produce an NOL, warns KPMG's Culp. That means companies also must decide whether using the new carryback is worth more than forfeiting the Section 199 deduction.
It also may be worthwhile for companies to recalculate their alternative minimum tax (AMT), says Laurie Asch, a tax attorney with Thomson Reuters, because doing so may show that a company has the opportunity to offset an additional 10% of AMT income. The NOL applies to AMT calculations, but generally, when a company carries back a loss, it can offset only up to 90% of its AMT income. But under this new carryback extension, explains Asch, that limitation is lifted in most cases, and companies that elect to carry back 2008 or 2009 NOLs can offset up to 100% of their AMT income. She points out, however, that the 50% limit on the fifth-year carryback is still enforced.
Of course, companies also have the option of not using the loss carryback at all, instead carrying the loss forward in anticipation of offsetting income in good years to come. Yet Willens argues that it is always preferable to carry back an NOL to prior years. This is true even if corporations expect tax rates to increase. That's because the carryback places cash into corporate coffers immediately, he says, while a carryforward is useful only if the corporation generates taxable income against which the NOLs can be offset. "That is always an iffy proposition," says Willens. "In this case, 'a bird in the hand is worth two in the bush.'"
Marie Leone is senior editor for accounting at CFO.
Government Assistance
Many companies have not yet announced their plans for NOL carrybacks, or have said they are still deciding whether to cash in now versus later. But some have moved swiftly to claim the cash refund and bolster battered balance sheets.
• Pulte Homes was hammered by the subprime crisis, and at press time was still calculating exactly how bad its 2009 losses were. But the company said using those losses to offset profits booked in rosier times would result in a cash refund of more than $450 million.
• For Schnitzer Steel Industries, a combination of the carryback extension and a manufacturing tax break effectively reduced the company's 2009 tax rate by 12.8%. Schnitzer, which reported $2 billion in revenues last year, claimed a $49 million tax refund.
• Pier 1 Imports was quick to file its carryback with the IRS and received a tax refund in January of $56 million.
• Jewelry purveyor Zale carried back operating losses from 2009 and filed for a $17 million refund.
• Recreational vehicle maker Winnebago Industries wasn't able to carry back all of its 2009 net operating losses until the government extension, which allowed the company to realize an additional refund of $4.8 million.
• Bank of Granite estimated that the benefit of the extended carryback could "approximate $4.0 million," adding that "the refund will also supplement the Bank's liquidity."
• William Lyon Homes is "considering" applying its 2009 losses to its 2004 taxable year. To maximize those losses (and, therefore, the refund), the company said it also might defer booking "cancellation of indebtedness" income that resulted from its repurchase of its own bonds during 2009.
Reader Comments» Post a comment