When companies closed their books on 2008, the financial crisis made itself very apparent: 3,700 publicly held corporations reported losses, a 9% increase over the previous year. Enter Congress, which offered a corporate tax break on a scale not seen since the aftermath of the terrorist attacks of September 11, 2001.
Last November, lawmakers ordered the Internal Revenue Service to temporarily amend the tax code to give all companies more flexibility in turning net operating losses (NOLs) into cash.
The tax-code alchemy conjured up by Congress and the Treasury Department extended what is known as the NOL carryback period, stretching it from two years to five for corporate losses incurred in 2008 and 2009. That means that corporate losses reported in those two years can be used to offset taxable income already reported during the prior five years.
In practical terms, that means companies can file for a cash refund from Uncle Sam for taxes they've already paid. And they can now do so for years that saw the highest corporate profits in the nation's history — 2005 and 2006 — when an aggregate $3.4 trillion in corporate profits was reported.
But weighing the benefits of the immediate cash infusion against the irreversible decision to forgo other potential tax benefits and credits is no simple matter. Although it's too early to tell how many companies will take advantage of the new NOL provision, Congress's Joint Committee on Taxation estimates that the extension will accelerate some $33 billion worth of corporate tax refunds.
The ability to "recover cash taxes" will help companies — especially those in such hard-hit sectors as retail, real estate, and manufacturing — sustain business operations and make investments during uncertain economic times, contends Ernst & Young tax partner John McMahon. Credit Suisse, in a report released a week after the rule was issued, estimated that S&P 500 companies will be eligible to apply for an aggregate $5 billion in refunds related to taxes paid in 2008 alone. Seventy-seven companies in the S&P 500 reported a loss in 2008, nearly triple the number from the year before, according to an analysis by CFO (see "Loss Leaders," below).
TARP Not Covered
The NOL carryback extension is part of the Worker, Homeownership, and Business Assistance Act of 2009, but temporarily extending the NOL carryback period to restock cash accounts is not a new concept. After 9/11, Congress granted a temporary five-year extension. In early 2009, it offered another five-year extension, but only for businesses with $15 million or less in sales.
Under the latest extension, companies of all sizes are permitted to carry back losses from either 2008 or 2009, but not both years. Small companies that benefited from the earlier extension can also take advantage of the new change, as long as they don't use losses from the same year twice. (For example, if a small company has already applied NOLs from 2008 to a prior taxable year, only a loss from 2009 can be carried back under the new legislation.)
The November 2009 extension has a few other restrictions. For example, companies that received bailout money under the government's Troubled Asset Relief Program are ineligible to use the NOL extension. "TARP beneficiaries were singled out for punishment" with regard to the extended carryback period, says Robert Willens, a tax expert who heads tax advisory service Robert Willens LLC.
Another twist: if a company elects to look back to the fifth taxable year, NOLs can be used to offset only 50% of the taxable income earned that year, notes David Culp, a senior manager with KPMG. If NOLs remain after offsetting the fifth year's income, then the company is permitted to apply the leftover NOLs to year four, three, and so on, until the offset is used up.
The fifth-year "haircut" was probably included to allay any congressional budget concerns, explains Darrell Poplock, a tax partner at PricewaterhouseCoopers, who says the new carryback provision is expected to cost the U.S. Treasury $10.4 billion over 10 years. According to the White House, however, the NOL portion of the bill is being paid for by several other measures, including a delay until 2018 of a tax break for corporations that involves interest allocation, an increase in penalties for failure to file S corporation and partnership tax returns, and a temporary increase in corporate estimated tax payments due to be paid from July to September 2014.
Cash in Hand
Credit Suisse calculates that the carryback extension increased the pool of taxes eligible for refund for S&P 500 companies by $270 billion for 2008, and by $338 billion for 2009 NOLs. The health-care industry appears to be the sector with the highest refund potential, says Credit Suisse, which estimates the industry could claim a total of $1.5 billion in refunds based on 2008 NOLs (see "Money in the Bank," above). Information-technology and energy companies are next in line, with possible refunds totaling $940 million and $766 million, respectively. Financial companies that didn't take TARP funds have the fourth highest refund pool for 2008, at $514 million.
Reader Comments» Post a comment