Law360 (May 1, 2020, 5:10 PM EDT) --
Costly changes in how businesses can use losses to lower their tax bills — even losses entirely unrelated to the pandemic — were slipped into the $2.2 trillion law, known as the Coronavirus Aid, Relief, and Economic Security, or CARES, Act. More was spent on this tax break for the rich than on safety net programs like food and housing aid ($42 billion) or on hospitals and public health funding ($100 billion), and it nearly equaled the $150 billion in assistance for states and localities.
This expensive tax cut in the middle of a national emergency is most generous to those who least need help. Over 80% of the benefits will go in 2020 to those making more than a million dollars a year, according to the Joint Committee on Taxation. That elite group of taxpayers — just 43,000 of them — will each receive an estimated average tax cut of $1.6 million in 2020, dwarfing the $1,200 apiece the rescue package will send to working Americans.
Presumptive Democratic presidential nominee Joe Biden has called for the repeal of this generous tax provision to pay for his college-debt relief program, noting the tax-law change "overwhelmingly benefits the richest Americans and is unnecessary for addressing the current COVID-19 economic relief efforts."
Two congressional tax specialists, Sen. Sheldon Whitehouse, D-R.I., and Rep. Lloyd Doggett, D-Texas, are lead sponsors of legislation to repeal this offensive tax break, along with a similar tax-rule change unduly benefiting corporations that costs over $25 billion. Their bills have attracted 18 co-sponsors in the Senate (including six senators who ran for president this cycle) and nearly 40 in the House. Their effort has been endorsed by 177 national and state organizations.
The plan is to attach the repeal measure to the next CARES 2 package, which is expected to focus on providing federal financial support for state and local government budgets collapsing under the pandemic.
Public awareness and outrage is growing at this exploitation of a national crisis to reward millionaires and big corporations with more tax cuts. Leading media outlets have published exposes: the New York Times focused on the benefits real estate investors like President Trump will enjoy, while the Orlando Sentinel highlighted how corporations and other businesses can reap big tax refunds from losses that predated the coronavirus by as much as seven years. Detailed analysis of the tax policy change has been provided by two respected think tanks, the Institute on Taxation and Economic Policy and the Tax Policy Center.
Businesses that lose money don't owe income taxes. Because business fortunes fluctuate — with a profitable year often followed by a money-losing one, and vice versa — the tax code has traditionally allowed companies to apply excess losses (net operating losses, or NOLs) to years before or after they occur. The shifting of NOLs lets businesses "smooth out" their income and therefore tax liabilities.
If a business "carries back" a loss to a year in which it paid tax, it can amend its original tax return to reflect the loss, generating a refund. During a recession — and we've undoubtedly now entered a steep one — such loss-generated refunds can be a good source of revenue for cash-strapped companies, allowing them to keep employees on payroll and generally softening the economy's downturn.
The CARES Act makes it easier for businesses to use losses to lower their taxes and generate refunds. It amends the federal tax overhaul of 2017 by temporarily repealing reforms that had tightened up the rules on losses to partially pay for big cuts in tax rates. But it gives businesses far too much, especially at a time of critical unmet needs.
The 2017 Trump-GOP tax law forbids firms from carrying losses back to former years but allows them to carry losses forward indefinitely. It also restricts to 80% the amount of current year losses that can be applied to other years' gains. The CARES Act temporarily removes both those restrictions — and not just for losses generated in this pandemic-induced recession year, but during the healthy and prosperous years of 2019 and 2018 as well. And the companies can apply those loses up to five years in the past.
That means if a company lost money in 2018 purely through mismanagement, it will be able to apply that loss as far back as 2013, reducing or wiping out profits from that year. By filing an amended tax return, it can pocket a big refund of all or part of the taxes incurred as far back as seven years ago.
On top of these handouts benefiting all kinds of companies, both corporate and not, the CARES Act creates an extra, $135 billion tax break exclusively for the wealthiest owners of noncorporate businesses: the sole proprietorships, partnerships and S corporations that are collectively known as "pass-throughs." Pass-through entities are so named because they pay no income taxes themselves, but instead pass all profits and losses through to their owners, who pay any tax due on their personal returns at individual rates.
Pass-throughs are often incorrectly equated exclusively with small businesses. While it's true that almost all small firms — the corner grocery, local dentist, neighborhood repair shop — are pass-throughs, this category of business is dominated by big players: hedge funds, Wall Street law firms, real estate developers like Trump. More than half of all pass-through income goes to the wealthiest 1% of business owners.
Unlike the typical corner grocer, wealthy pass-through business owners often have significant sources of income beyond the business, including from passive financial investments. The 2017 law limits to $250,000 ($500,000 for couples) the amount of loss from a pass-through business owners can set against their other income (sale of personal stocks or real estate) to reduce taxes. The CARES Act temporarily lifts that cap. Just as with the loosened carryback rules, this new allowance applies not just to our pandemic-ravaged year, but to the two previous, economically booming years as well.
It's not hard to understand why the vast bulk of this break goes to the wealthiest business owners, since a couple needs over a half million dollars in nonbusiness income to benefit.
Real estate investors like Trump and his son-in-law Jared Kushner are particular beneficiaries of this loophole. That's because owners of real estate can generate big paper losses by writing down the value of their properties, even when they are in reality gaining in value. Both Trump and Kushner have a history of using huge losses to dodge millions of dollars in taxes.
It's not just the cost of these tax breaks that's hurtful to a nation in crisis, but also their injustice. Allowing loss carrybacks is always a boon to corporations, but because the 2017 law cut the corporate tax rate by two-fifths, allowing recent losses to be applied to years prior to 2018 is particularly generous.
Before Jan. 1, 2018, the top corporate tax rate was 35%. Since then, it's been 21%. So, the same hundred-dollar loss that would in 2019, for instance, save only $21 in taxes can generate a $35 refund on taxes paid in, say, 2015. Because the top individual tax rate was cut much less than the corporate rate, pass-through business owners can benefit from a similar, though less lucrative, form of "rate arbitrage."
Permitting an accounting maneuver that reaches deep into the last decade and exploits tax-rate differences is not an emergency response to a crisis — it's an unjustifiable handout to the wealthy.
That these two breaks are supposed to be temporary doesn't mean they'll actually go away. Congress has a long shameful history of keeping allegedly temporary loopholes open for years, even decades. The rich, politically powerful beneficiaries of these two breaks will almost certainly launch a vigorous campaign to prevent the "tax increase" they'll claim the provisions' scheduled expiration represents.
For the unscrupulous, alas, tragedy represents opportunity. Thus, the rash of COVID-19 snake-oil cures and "recovery rebate" scams. Extravagant tax handouts to the wealthy buried in a bill meant to relieve the suffering of the vulnerable is just a high-rent version of the same kind of fraud.
Congress should use the next coronavirus rescue package to undo this expensive boondoggle and direct the money saved to those who really need it, starting with the state and local governments on the front lines of the coronavirus battle.
State governors say they need $500 billion and local governments are asking for another $250 billion in federal aid to effectively fight the pandemic and support their citizens through the economic downturn. Those local governments — along with health care workers lacking protective gear, the suddenly unemployed and the still employed in hazardous jobs — are the ones facing real losses. They are the ones who deserve our help.
Update: This article has been updated to include the most recent statistics for confimred cases and deaths in the United States related to the novel coronavirus.
Frank Clemente is executive director of Americans for Tax Fairness.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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