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https://www.wsj.com/articles/losing-money-is-a-winning-pandemic-tax-strategy-for-some-companies-11596879000

ECONOMY | U.S. ECONOMY

Losing Money Is a Winning Pandemic Tax

Strategy for Some Companies
Rules designed to help struggling companies conserve cash and get refunds may also encourage tax
arbitrage

FedEx, which booked a $71 million bene it from tax-rate di erences, is seeking IRS
approval for an accounting change that would add $130 million.
PHOTO: JONATHAN WONG SOUTH CHINA MORNING POST GETTY IMAGES

By Richard Rubin and Theo Francis

Aug. 8, 2020 5 30 am ET

WASHINGTON—There’s a simple rule for corporate tax planning in 2020: If you’re

going to lose money, lose a lot of money.

That’s because companies can now use losses incurred before and during the
pandemic to offset up to five years of past profits. What makes this moment
particularly attractive: Congress is letting companies get refunds of taxes they
paid at the 35% corporate rate that existed before 2018 rather than at today’s 21%
rate.

Companies can generate big losses now by packing deductions into 2020 and
pushing income into the future. Nearly two dozen large publicly traded companies
are already reporting more than $2 billion in combined tax benefits using this rate
arbitrage, according to a review of securities filings. Tax advisers and experts
expect more soon.

“We’re going to see some of the biggest firms in the U.S. economy benefit,” said
Rebecca Lester, a Stanford University accounting professor.

For corporations with past profits, current losses and little risk of insolvency, the
math is compelling. A $1 million deduction taken in 2020 is worth up to $350,000 in
federal tax savings. The same $1 million deduction taken in 2021 is worth at most
$210,000.

Companies are already claiming benefits related to 2018 and 2019 losses, and they
have the rest of this year to maximize 2020 losses before the opportunity begins
to expire. Strategies include buying deductible equipment, accelerating bonuses,
contributing to pension plans and exploring accounting-method changes.

FedEx Corp. , which booked a $71 million benefit from tax-rate differences, is
seeking Internal Revenue Service approval for an accounting change that would
add $130 million, according to a securities filing. FedEx reported $4.9 billion in
cash and equivalents on its balance sheet on May 31, more than double what it had
a year earlier.

Extended Stay America Inc., a hotel chain with a traditional “C corporation” that
pays corporate taxes and a real-estate investment trust where taxes are paid by
investors, is trying to concentrate any losses in the corporation.

“You can actually carry back and essentially receive a refund and at the higher tax
rates that applied in the past five years,” Brian Nicholson, chief financial officer,
said at a June conference. “We are incented to try to keep our C corp’s taxable
income as low as possible.”

Moelis & Co., an investment bank, recorded $14 million in income-tax benefits,
citing 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, Extended Stay America and Moelis declined to

comment beyond filings and public comments.

Other companies, including some in struggling industries, are recording benefits

from the rate difference. Marathon Petroleum Corp. said it would get a benefit to
income of $309 million. Assurant Inc., an insurance company, recorded $79 million
benefit and JetBlue Airways Corp. reported $35 million.

In the past, accelerating deductions and postponing revenue had modest effects.
That is because moving income from one year to another doesn’t do much when
tax rates are stable and interest rates are low.

For large public companies and for their closely held counterparts, the tax-rate
gap changes everything.

“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.”
The tax-arbitrage opportunity stems from the March economic relief law. Until
then, because of changes Congress made in 2017, losses couldn’t be carried back
but could be carried forward indefinitely.

The March law changed rules for companies with net operating losses.
Lawmakers wanted to help cash-strapped companies get money quickly and they
imposed no restrictions on how the money can be used. So losses from 2018, 2019
and 2020 can now be carried back for up to five years.

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

The tax break has come under attack. In May, the House passed a bill that would
prevent companies using losses from taking advantage of rate differences. That
proposal’s fate is tied up in broader negotiations over further pandemic relief
spending.

“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.”

Mr. Doggett said he understands companies’ need for liquidity during a recession
but argues that the March provision isn’t the best way to do so. A tax break based
on current losses and past profits can help some companies that need quick cash
to survive, but it can also provide money to companies that don’t.

Even many successful businesses post losses occasionally, meaning the provision
is likely to benefit a range of companies, Ms. Lester said.

Firms are now planning strategies for the next few months, such as buying
equipment. The 2017 tax law lets companies deduct those costs from taxable
income immediately instead of over time. Companies now have an incentive to
accelerate such spending to generate losses. The tax break could make a
previously unprofitable project worthwhile.

“If I’m going to do something in the next 12 months anyway, I just made it [14
percentage points] better to do it now,” said Bret Wells, a University of Houston
law professor. “That’s a pretty high rate of return.”

But companies should still think about whether any investment makes business
sense, especially during a crisis, said Nick Gruidl, a partner at accounting firm RSM
US LLP.

Tax advisers are urging their clients to consider accounting strategies they might
not have otherwise employed.

That can include deducting prepaid expenses such as insurance contracts up front
instead of over time, Mr. Werlhof said. Companies can change how they account
for delayed revenue, for example, deferring recognition of gift-card income from
when they are sold to when they are redeemed.

Other companies can consider writing off receivables if they determine customers

won’t ultimately pay, said Lewis Taub of Berkowitz Pollack Brant Advisors + CPAs
in New York.

Some business owners should focus less on getting small-business loans and more
on reclaiming past income tax payments, he said.

“You want some real money?” Mr. Taub said. “Go back and get that million dollars
you paid five years ago.”

Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis at

theo.francis@wsj.com

Appeared in the August 10, 2020, print edition as '.'

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