U.S. homebuilders, lenders and other struggling companies could receive hefty one-time tax refunds this year and next under a provision of the economic stimulus plan percolating in Washington.
President Bush and lawmakers from both parties aim to quickly inject capital into the economy, which has been hit hard by turmoil in the housing and credit markets, by extending the timeframe under which companies are allowed to retroactively deduct net operating losses against earlier profits.
It would be the second time in recent history that the government has amended this accounting tool, known as a "tax loss carryback," to stimulate the economy in the face of a recession.
Under the proposal, one of several emergency tax breaks being considered for corporate America, companies would for two years be allowed to carry back losses incurred in 2007 and 2008 against profits accrued over the previous five years, instead of the usual two year timeframe.
Some of the biggest beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co., Morgan Stanley and Bear Stearns Cos. Homebuilders, which have been punched by the housing slump after years of go-go profits, also stand to benefit. In fact, any company that is now struggling following years of healthy profits (that pumped up their tax bills) could in theory benefit.
Extending the carryback period "provides financial support for (corporate) taxpayers who are experiencing large losses," said Leslie Samuels, an assistant Treasury secretary for tax policy in the Clinton administration, now a partner at the law firm Cleary Gottlieb Steen & Hamilton in New York.
Randy Paschke, chairman of the accounting department at Wayne State University in Detroit, said investment banks' write-offs from mortgage-related losses are so large, "they probably wouldn't get all their taxes back with just a two-year carryback."
Here's how a tax loss carryback works:
Say a company reports a net operating loss of $100 in 2008 and had combined profit of $100 in 2006 and 2007. Under the current carryback regime, it could claim a $0 net profit and would get a refund of the $35 it paid in tax on the $100 profit, at the corporate tax rate of 35 percent. If the carryback period was extended to five years, the company could also claim refunds on taxes paid on profits in the years 2003-2007.
Net operating loss refers to the amount of expenses that exceed income in a tax year. A profitable company can still record a net operating loss.
The tax loss carryback provision is a morsel of the roughly $145-billion economic stimulus plan being negotiated by the administration and Congress, which would include rebates of several hundred dollars for individuals and couples, and so-called bonus depreciation to allow companies to deduct 50 percent of business investments they make this year. Democratic lawmakers are calling for boosts in unemployment benefits, food stamp payments and the Medicaid health care program for the poor and disabled.
Whether it survives the negotiating process and final cut as legislation will depend, as with the other elements of the plan, on the interplay in Congress and potential horse-trading with the White House.
As of Wednesday, "everything remains on the table," Rep. Charles Rangel, D-N.Y., chairman of the tax-writing House Ways and Means Committee, said in a statement.
The provision being considered would allow companies to carry back their 2007 net operating losses to 2002, and their net operating losses this year to 2003, so that they could now file amended tax returns seeking refunds for 2007.
Such an extension of the carryback period to five years, though temporary, was part of a stimulus package enacted in March 2002 in response to the economic dislocation caused by the Sept. 11, 2001, terror attacks.
"It gave (companies) an infusion of cash at a time that they needed it," said Dorothy Coleman, director of tax policy at the National Association of Manufacturers, a major lobbying organization.
In April 2002, Owens-Illinois Inc., one of the biggest makers of glass containers, put that money toward reopening a bottle-making plant in Brockway, Pa., that had been shuttered since late 2000, according to the company and the manufacturers' group. The plant employed around 60 or 70 workers upon reopening but has since been expanded.