Most companies won’t immediately see relief from a tax benefit lawmakers are seeking to reinstate that would allow them to carry losses back to earlier, more profitable years.
The change, meant to smooth over the pain of economic downturns, is included in the Senate’s sweeping coronavirus response package (H.R. 748), which passed the chamber late Wednesday and the House is poised to vote on this week. Most companies wouldn’t see the benefits until next year, with some exceptions. For instance, retailers, many of which have closed their doors, may benefit sooner, because they tend to not operate on a calendar-year schedule.
“This is going to be useful when the time comes, but it has absolutely nothing to do with an immediate cash infusion,” said Robert Willens, a New York-based tax consultant.
The provision would allow companies to use losses as retroactive tax offsets that generate refunds—a benefit the 2017 tax act eliminated. Losses for 2020 are set to balloon as state and local governments force businesses to effectively shut down and instruct people to stay home.
“The size of the checks the government issues will be huge” under this provision, said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, calling the amount of the losses to be carried back from this year “staggering.”
Most companies are operating on a calendar year schedule, however, and have to wait until 2021, when their losses are tallied, to file the appropriate forms to get those refunds.
“It doesn’t help so much in the short term for cash flow,” said Nicole Kaeding, vice president of policy promotion and economist at the National Taxpayers Union Foundation. Still, she added, “it does ensure the tax code is taxing companies based on their actual income.”
There are some exceptions, Kaeding and other tax professionals noted.
While 2018 and 2019 were good years for the private sector, some companies may have generated losses they can now carry back to years in which the corporate rate was at 35%, and get a bigger tax benefit than they would by carrying the losses forward to later years under the current 21% rate.
A $100,000 loss deduction, for instance, would be worth $35,000 in the years before the 2017 tax law went into effect and $21,000 in the years after.
“I would not anticipate widespread loss carryback claims for 2018 and 2019,” said Doug Bekker, a tax partner at BDO USA LLP in Grand Rapids, Mich. “For 2018 and 2019, most companies were in a good position.”
The big bucks—and much of the work for the IRS—will come in early 2021, tax professionals said.
There are several forms that enable companies to get refunds by carrying back losses, with the resulting refunds arriving at varying speeds, but generally companies must wait until the end of the loss year to use them.