Stimulus Bill Bites Losing Companies

Centrists in Congress demanded cuts in the stimulus package, and out the window went a big tax break for companies that will report losses in 2009 ...
Marie LeoneFebruary 13, 2009

Companies that generated losses over the past year will get stung by the stimulus compromise bill that will likely be signed by President Obama on February 16. The $790 billion economic recovery package that was blessed by the White House and Congress Wednesday night decimated the net operating loss carryback provision, making it useless for all but the smallest companies.

In the current draft bill, the NOL carryback language applies only to companies with revenues of $15 million or less. Until now it has applied to all loss corporations. The change “diminished” the NOL carryback provision, says Ed McClellan, a tax partner with PricewaterhouseCoopers. 

McClellan estimates that the revenue threshold in the new provision is one-tenth of those in the originally proposed House and Senate measures. On the whole, the final compromise draft package is smaller than either the $838 billion Senate bill or $820 billion House measure that were first being sold on Capitol Hill.

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Shrinking the stimulus package was necessary to pass the compromise bill, McClellan tells He explains that the centrist contingent in Congress were demanding cuts, and one of the victims was the original NOL carryback provision. “I am a little surprised [it] fell out because it meant a cash infusion to people who pay taxes, and would have allowed them to survive the down turn,” noted McClellan.

The earlier provision would have extended the current NOL carryback rule from two to five years. In practical terms, that means companies that generated losses for 2008 and 2009 would be able to use those losses in one of two ways: to offset taxable income which will lower a current tax bill, or to claim a refund on taxes already paid, which would put cash in their hands.

The NOL was designed to help cash-strapped companies that don’t have access to the capital markets, so it is a great “leveler,” reckoned McClennan. Indeed, it would have allowed many companies still subject to the credit crunch to boost liquidity through the cash refund.

From a business tax perspective, the original NOL carryback provision “had the most juice,” asserts Rick Klahsen, managing director with RSM McGladrey. “It was the provision with the broadest application in terms of affected taxpayers, giving companies across a wide spectrum the opportunity to regain prior paid taxes.”

Klahsen points out that the compromise draft that was reported out of committee yesterday is still beneficial to a broad range of smaller companies, and he suspects companies will make use of the tax refund to generate cash that can be used to pay bills, meet payroll, and retire high-priced debt.

Other surviving provisions, such as the extension of the bonus depreciation benefit and expansion of the debt cancellation provision, target companies that have the cash or customer demand to expand their business or repay debt, respectively. Both of those provisions are good for business, but neither addresses the plight of loss corporations.

The debt cancellation provision allows companies to defer recognition of income associated with a repurchase of debt. Currently, forgiveness of debt or the repurchase of debt at a discount must be included in income as cancellation of debt income and recognized as a gain, says a Grant Thornton client advisory.

The new compromise bill gives companies more flexibility with regard to repurchased debt. Specifically, for debt repurchased by a company in 2009 and 2010, recognition of the associated gain is deferred until 2014, notes Grant Thornton. Further, the income recognition is spread over the next five years, starting in 2014.

The bill also extends the 50 percent bonus depreciation allowance for another year to property placed into service in 2009, says Grant Thornton. The special bonus is available on top of the regular first-year allowance tied to the purchase of most types of tangible property placed into service in 2009. The regular deduction is a complete write-off in the year the equipment goes into service, while the bonus depreciation provision accelerates the recovery period.

So, if a taxpayer has cash on hand and is looking to make a purchase in 2009, it may be worth making the purchase sooner than later to generate extra cash flow from the deductions.