Companies manipulate losses, use pandemic relief law to maximize tax benefits

New government tax law has encouraged companies to manipulate their losses in order to maximize their tax benefits, The Wall Street Journal reported.

The policy at the heart of this trend is a change to how companies can report losses. A March economic relief law changed rules for companies with net operating losses in a bid to help cash-strapped companies get money quickly: companies can get refunds of taxes they paid at the pre-2018 corporate rate of 35% instead of today’s 21% rate.

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Losses from 2018, 2019 and 2020 can now be carried back for up to five years.

Companies can generate huge losses to offset their taxes by packing deductions into 2020 and pushing income into the future. The strategy incentivizes companies to accelerate spending, such as buying equipment, paying insurance contracts upfront or deferring recognition of gift-card income.

The strategy is not new: in the past, companies have accelerated deductions and postponed revenue, but stable tax rates and low-interest rates usually mitigate the benefits. Tax advisers are urging their clients to consider accounting strategies they might not have otherwise employed.

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“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.”

Companies immediately began asking for refunds based on 2018 and 2019 losses and examining 2020 finances to see what deductions they could take.

Companies that have benefited from this strategy include FexEx Corp., which is seeking IRS approval for an accounting change to add $130 million to filings, and Moelis & Co., an investment bank that recorded $14 million in income-tax benefits -- citing the rate difference as the main factor.

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JetBlue Airways Corp reported $35 million in benefits from 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 and Moelis declined to comment beyond filings and public comments, WSJ reported.

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“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.”