House Speaker Nancy Pelosi (D-Calif.) is proposing a retroactive tax increase on struggling American businesses in her recently released “Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act.” If enacted into law, it will speed up job losses by denying businesses the liquidity they need to continue paying workers and keep the lights on.
The bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March allowed corporations to carry back net operating losses (NOLs) incurred in 2018, 2019, and 2020 back five years. It also allowed businesses organized as passthrough entities to use NOLs to offset against non-business income.
These provisions were designed to help workers by ensuring businesses had cash to meet expenses and make payroll. This legislation was also supported unanimously by Democrats in the House and Senate.
Pelosi and House Democrats are now trying to retroactively reverse this policy and restrict net operating losses.
The Pelosi bill contains several restrictions. First, it prevents any businesses from carrying back losses before 2018.
This would mean 2018 losses could not be carried back at all, 2019 losses could be carried back just one year (to 2018) and 2020 losses could be carried back just two years (2018 and 2019). The CARES Act provision allowing passthroughs to offset business losses against non-business income would also be suspended.
In addition, the Pelosi bill prohibits businesses from taking NOLs if they make “excessive” stock buybacks and dividend payments. This restriction is triggered if the total amount of dividends and repurchased shares since 2018 exceeds 5 percent of the value of the stock in the last day of any taxable year. The average annual dividend yield of a S&P 500 company is around 2 percent so this threshold can easily be triggered by dividend payments alone.
Finally, the bill denies carrybacks if a company triggers section 162(m) or 280(g) – provisions that limit the ability of businesses to deduct compensation payments to executives.
These provisions are all effective retroactive to enactment of the CARES Act.
There is nothing controversial about expanding net operating loss carrybacks. Variants of this proposal have been enacted into law repeatedly over the past 20 years by Republican and Democrat presidents. For instance:
- The Job Creation and Worker Assistance Act of 2002 allowed five-year carryback of losses for 2001 and 2002.
- In response to Hurricane Katrina, the Gulf Opportunity Zone Act of 2005 allowed five-year carryback NOLs for those affected by the hurricane.
- The American Recovery and Reinvestment Act of 2009 allowed five-year carryback of NOLs for small businesses for 2008.
- The Worker, Homeownership, and Business Assistance Act of 2009 expanded 5 year NOLs to medium and large businesses and allowed them to be used for both 2008 and 2009.
President Obama even highlighted NOL expansion as a “fiscally responsible economic kick-start,” in a 2009 press release:
“The Economic Recovery Act included a provision that allowed small businesses to count their losses this year against the taxes they paid in previous years. “Today, the President extended that benefit for an additional year and expanded it to medium and large businesses as well. Business losses incurred in 2008 or 2009 can now be used to recoup taxes paid in the prior five years. This provision is a fiscally responsible economic kick-start, putting $33 billion of tax cuts in the hands of businesses this year when they need it most, while enabling Treasury to recoup the majority of that funding in the coming years as these businesses regain their strength and resume paying taxes.”
Some have raised concerns that allowing businesses to carryback losses before 2018 will provide a windfall or excessive benefits because businesses will be able to apply losses incurred today from the post-TCJA 21 percent rate against the pre-TCJA 35 percent rate that existed in 2017.
First, it is important to note that there is precedent for this. In 2002, Congress allowed passthroughs to carryback losses despite the fact that the tax rates had been reduced the year before through the Economic Growth and Tax Relief Reconciliation Act.
In addition, this criticism does not change the fact that businesses desperately need help surviving the pandemic, which has restricted commerce and forced businesses to shutter. In the past eight weeks, almost 37 million people have filed for unemployment and the unemployment rate has risen from a 50-year low of 3.5 percent earlier this year to 14.7 percent in April. The Congressional Budget Office now projects that GDP will decline by 12 percent during the second quarter of 2020.
Dozens of businesses are already using NOLs and other tax provisions enacted by the CARES Act to help them survive the damage caused by COVID-19, according to a report from the Wall Street Journal.
If these tax cuts are taken away, job losses and business failures will only accelerate.
Rather than denying tax cuts to struggling businesses, Pelosi and Democrats should focus on enacting proposals that help businesses weather the Coronavirus storm so that workers can keep getting paid and keep their jobs.