Paul L. Caron

Thursday, March 19, 2020

WSJ: Tax Law Changes Make Life Harder For Firms Facing Coronavirus Losses

Wall Street Journal, Tax Law Changes Make Life Harder for Firms Facing Coronavirus Losses:

CoronavirusThe 2017 tax law is making life harder for U.S. businesses that suffer sudden losses, and Congress is under pressure to relax some of those provisions as the economy reels from the impact of the coronavirus.

To help pay for cutting the corporate tax rate, the law curtailed deductions for net operating losses and interest. The changes to loss deductions, in particular, make it harder for companies to use today’s losses against past profits and claim quick refunds for cash infusions.

The previous tax law “was a classic automatic stabilizer, helping businesses weather an economic storm,” said Martin Sullivan, chief economist at Tax Analysts, the nonprofit publisher of Tax Notes. “This is especially important now because businesses, large and small, are seeking liquidity.”

Changes to loss deductions and other business tax provisions could come soon as Congress tries to respond to the sudden economic shock of the virus. The National Association of Manufacturers has already asked Congress to consider loosening rules on loss deductions. “Wait and see, Congress is gonna wish they hadn’t used net operating loss restrictions to pay for rate cuts,” Sullivan said. ...

Before the 2017 tax law, businesses could carry their losses back for up to two years to offset past profits and forward for 20 years as deductions against future profits. They could often seek fast refunds of past year’s taxes if they started reporting losses.

“You want some safety valve in the system that allows for liquidity, cash liquidity,” said Dan Luchsinger, chair of the tax practice at Covington and Burling LLP. “We’re in a world now where there is no quickie refund.”

The previous system was a recognition that businesses’ fortunes don’t necessarily match tax law’s annual measurement periods. The deductions effectively allowed businesses to average their income across an entire business cycle. ...

If Congress allows loss carrybacks or makes other changes, corporate tax revenue could plummet as money-losing companies get refunds and still-profitable companies earn less.

“The fact that it would reduce revenues right now would be a feature, not a bug,” said William Gale, a senior fellow at the Brookings Institution, who has long worried about the country’s long-term budget deficits. “The economy is more important than the budget, basically. And people’s health is more important than the economy.”

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