WASHINGTON—There’s a simple rule for corporate tax planning in 2020: If you’re going to lose money, lose a lot of money.
That’s because companies can now use losses incurred before and during the pandemic to offset up to five years of past profits. What makes this moment particularly attractive: Congress is letting companies get refunds of taxes they paid at the 35% corporate rate that existed before 2018 rather than at today’s 21% rate.
Companies can generate big losses now by packing deductions into 2020 and pushing income into the future. Nearly two dozen large publicly traded companies are already reporting more than $2 billion in combined tax benefits using this rate arbitrage, according to a review of securities filings. Tax advisers and experts expect more soon.
“We’re going to see some of the biggest firms in the U.S. economy benefit,” said Rebecca Lester, a Stanford University accounting professor.
For corporations with past profits, current losses and little risk of insolvency, the math is compelling. A $1 million deduction taken in 2020 is worth up to $350,000 in federal tax savings. The same $1 million deduction taken in 2021 is worth at most $210,000.
Companies are already claiming benefits related to 2018 and 2019 losses, and they have the rest of this year to maximize 2020 losses before the opportunity begins to expire. Strategies include buying deductible equipment, accelerating bonuses, contributing to pension plans and exploring accounting-method changes.
FedEx Corp., which booked a $71 million benefit from tax-rate differences, is seeking Internal Revenue Service approval for an accounting change that would add $130 million, according to a securities filing. FedEx reported $4.9 billion in cash and equivalents on its balance sheet on May 31, more than double what it had a year earlier.
Extended Stay America Inc., a hotel chain with a traditional “C corporation” that pays corporate taxes and a real-estate investment trust where taxes are paid by investors, is trying to concentrate any losses in the corporation.
“You can actually carry back and essentially receive a refund and at the higher tax rates that applied in the past five years,” Brian Nicholson, chief financial officer, said at a June conference. “We are incented to try to keep our C corp’s taxable income as low as possible.”
Moelis & Co., an investment bank, recorded $14 million in income-tax benefits, citing the rate difference.
“There are some substantial benefits that are coming as a result of some tax timing differences that create taxable losses,” Joseph Simon, chief financial officer, told analysts in July.
Representatives for FedEx, Extended Stay America and Moelis declined to comment beyond filings and public comments.
Other companies, including some in struggling industries, are recording benefits from the rate difference. Marathon Petroleum Corp. said it would get a benefit to income of $309 million. Assurant Inc., an insurance company, recorded $79 million benefit and JetBlue Airways Corp. reported $35 million.
In the past, accelerating deductions and postponing revenue had modest effects. That is because moving income from one year to another doesn’t do much when tax rates are stable and interest rates are low.
For large public companies and for their closely held counterparts, the tax-rate gap changes everything.
“These are all strategies that have been available, tried-and-true tax strategies,” said John Werlhof, a principal at CliftonLarsonAllen LLP in Roseville, Calif., who represents small and midsize companies. “All this does is raise the stakes.”
The tax-arbitrage opportunity stems from the March economic relief law. Until then, because of changes Congress made in 2017, losses couldn’t be carried back but could be carried forward indefinitely.
The March law changed rules for companies with net operating losses. Lawmakers wanted to help cash-strapped companies get money quickly and they imposed no restrictions on how the money can be used. So losses from 2018, 2019 and 2020 can now be carried back for up to five years.
Companies immediately began asking for refunds based on 2018 and 2019 losses and examining 2020 finances to see what deductions they could take.
The tax break has come under attack. In May, the House passed a bill that would prevent companies using losses from taking advantage of rate differences. That proposal’s fate is tied up in broader negotiations over further pandemic relief spending.
“The appetite for corporate tax breaks is truly insatiable,” said Rep. Lloyd Doggett (D., Texas), who wants to repeal the rate-arbitrage opportunity. “Now, it’s like time travel.”
Mr. Doggett said he understands companies’ need for liquidity during a recession but argues that the March provision isn’t the best way to do so. A tax break based on current losses and past profits can help some companies that need quick cash to survive, but it can also provide money to companies that don’t.
Even many successful businesses post losses occasionally, meaning the provision is likely to benefit a range of companies, Ms. Lester said.
Firms are now planning strategies for the next few months, such as buying equipment. The 2017 tax law lets companies deduct those costs from taxable income immediately instead of over time. Companies now have an incentive to accelerate such spending to generate losses. The tax break could make a previously unprofitable project worthwhile.
“If I’m going to do something in the next 12 months anyway, I just made it [14 percentage points] better to do it now,” said Bret Wells, a University of Houston law professor. “That’s a pretty high rate of return.”
But companies should still think about whether any investment makes business sense, especially during a crisis, said Nick Gruidl, a partner at accounting firm RSM US LLP.
Tax advisers are urging their clients to consider accounting strategies they might not have otherwise employed.
That can include deducting prepaid expenses such as insurance contracts up front instead of over time, Mr. Werlhof said. Companies can change how they account for delayed revenue, for example, deferring recognition of gift-card income from when they are sold to when they are redeemed.
Other companies can consider writing off receivables if they determine customers won’t ultimately pay, said Lewis Taub of Berkowitz Pollack Brant Advisors + CPAs in New York.
Some business owners should focus less on getting small-business loans and more on reclaiming past income tax payments, he said.
“You want some real money?” Mr. Taub said. “Go back and get that million dollars you paid five years ago.”
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