The voices of Tax Policy Center's researchers and staff
The one tax issue that still seems unresolved in the stimulus debate involves a provision that would let businesses convert current losses into cash. The measure would allow a firm that is losing money in today's recession to redo up to five years worth of tax returns. That way it could use those losses to get a refund of some taxes it paid in past years.
The ability to carry back these Net Operating Losses for up to five years could be an important boost to cash-strapped companies. Like many individuals, businesses desperately crave cash now. Many cannot borrow in the constipated credit markets, their sales are plummeting, and a little more operating cash may be the difference between having to lay off more workers or keeping them on the job. The NOL carryback is an easy way to get quick money to these businesses.
It could also provide something of a boost to other provisions, such as bonus depreciation. Giving firms a faster tax write-off for capital investment sounds like a fine idea. But, companies can’t use it if they have excess losses they can’t deduct. The NOL change would make it possible for many businesses to use bonus depreciation, giving them an incentive to buy equipment sooner.
Unfortunately, the conferees emasculated the proposal, which had been in both the House and Senate bills. Their compromise would allow only small businesses to carry back these NOLs for extra years—a change that makes the provision essentially worthless as stimulus. The conferees turned a $15 billion to $20 billion tax cut to one worth less than $1 billion.
According to reports this morning, Senator Olympia Snowe (R-Maine), is still trying to restore the broader measure so that all businesses regardless of size would be eligible to use the carrybacks. I hope she succeeds.
Like other tax stimulus, this one is not perfect. Some money would inevitably go to zombie businesses that cannot survive, with or without this tax benefit. However, Congress already moved to prevent other potential problems. For instance, the earlier versions barred financial institutions that get federal bailout funds from double-dipping by using more generous NOLs as well.
The NOL carryback was among the best of the business tax breaks Congress considered in the stimulus debate. It ought to keep it.
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