WASHINGTON — 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, Merrill Lynch, Morgan Stanley and Bear Stearns. 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, which pumped up their tax bills, could in theory benefit.
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.”
The tax loss carryback provision is a morsel of the roughly $145 billion economic stimulus plan being negotiated by the administration and Congress.
How a tax-loss carryback works
• A company reports a net operating loss of $100 in 2008 and had combined profit of $100 in 2006 and 2007.
• Currently, 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 also could 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.
