Individuals aren’t the only ones about to get checks from the federal government.
The $2.2 trillion economic rescue package that raced through Congress last week includes a suite of business tax breaks that will soon have companies and their owners lining up for tax refunds of their own.
Some of the tax breaks will let corporations reclaim taxes paid on profits as far back as 2013. Another benefits the nation’s richest investors and business owners.
The goal of the tax changes is to quickly infuse cash into suddenly struggling firms whose revenues are collapsing while cities and states make residents shelter in their homes to slow the spread of the new coronavirus.
Some experts say the business tax breaks — which drew far less scrutiny during the rushed congressional debate than plans to send $1,200 rebate checks to most Americans or use $500 billion backstopping loans to big companies — could turn out to be one of the most generous elements of the federal government’s entire COVID-19 relief plan.
“I expect that we’ll see huge amounts of money — checks being written — through quickie refunds,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a Washington-based research group affiliated with the Brookings Institution. “We’re going to see business tax collections wiped out to a great degree.”
Just over two years ago, the Republican-controlled Congress and President Donald Trump enacted the Tax Cuts and Jobs Act — a nearly $2 trillion tax cut whose biggest features included slashing the federal corporate income tax from 35 percent to 21 percent.
To soften the deficit hit from one of the largest tax cuts in the American history, lawmakers also eliminated or reduced a number of tax breaks. They stopped companies from using new losses to get tax refunds on old profits and limited their ability to use old losses to wipe out taxes on new profits. They also cut the tax deductions companies can claim when they borrow money.
The new COVID-19 economic-relief package — which Congress dubbed the “CARES Act,” an acronym for “Coronavirus Aid, Relief, and Economic Security” — essentially undoes those changes, at least through the end of this year.
The legislation lets companies write off a much larger chunk of the interest they pay on their debt — an especially valuable break right now with so many firms borrowing as much money as possible in order to stockpile cash. And it lets companies use any losses they incur to completely offset profits booked over the past five years.
Both changes are retroactive: They apply not just to companies’ 2020 taxes, but to their tax bills from 2018 and 2019, too. That will allow businesses to begin filing for tax refunds immediately.
What makes these tax breaks especially valuable, experts say, is the way they will work in conjunction with each other — and with the deep corporate tax rate cut made in December 2017 by the Tax Cuts and Jobs Act.
Consider a company with lots of debt that reported a loss for tax purposes in 2018. It can now use the more generous tax deduction for interest expense to take an even bigger loss for 2018 and then use that bigger loss to get a refund on taxes it paid in 2013 — when the corporate tax rate was still 35 percent.
“There are pretty significant interactions between some of these,” said Kyle Pomerleau, a fellow at the conservative-leaning American Enterprise Institute. “The carryback is what allows them to use the other deductions that were expanded.”
Critics of the corporate tax cuts say they will wind up steering billions of dollars to companies that either don’t need the help or don’t deserve it.
For instance, some companies could turn bigger profits during the pandemic — businesses like tech giant Amazon.com Inc., cleaning product manufacturer Clorox Co. or video-conferencing provider Zoom Video Communications Inc. But they would still benefit from the expanded tax break on interest payments.
And some companies that struggled in 2018 or 2019 — long before the economic collapse caused by the coronavirus — will still benefit from the looser rules on losses.
“It’s really a ‘Heads I win,’ for businesses, ‘tails the government loses,'” Rosenthal said.
Others say it’s a necessary tradeoff in the midst of crisis.
With the U.S. economy essentially forced into a medically induced coma while the nation fights the coronavirus pandemic and Congress attempting to inject as much liquidity into businesses as possible, lawmakers were better off being too generous with tax cuts than too stingy, said George Callas, a Washington tax lobbyist who used to be the tax counsel to former U.S. House Speaker Paul Ryan, R-Wis.
“Given we’re facing a total meltdown of the economy, we’d rather have some undeserving people get tax breaks than some deserving people not get them,” Callas said. “When the world is on fire and the primary priority is getting cash out there, then you worry less about that kind of stuff.”
The most controversial tax break in the coronavirus aid package is one for wealthy owners of companies other than corporations — pass-through entities like limited liability companies whose profits and losses get included on their owners’ personal tax returns.
Owners and investors in these kinds of businesses used to be able to use their business losses to wipe out their income from other sources, such as their salaries or stock market investments.
The Tax Cuts and Jobs Act imposed new limits so that investors could only offset their first $250,000 of nonbusiness income for an individual or the first $500,000 for a married couple — roughly the wealthiest 1 percent of Americans.
But the CARES Act eliminates those income caps for 2018, 2019 and 2020, which will allow those wealthy business investors to seek tax refunds, too.
The change is a boon for real-estate investors in particular, said Amanda Wilson, a shareholder at Lowndes, the Orlando law firm. That’s because real-estate investors frequently generate big losses — typically only paper losses for tax purposes — by buying buildings and then writing them off over time, even if the value of the building is rising in the real world.
“A real estate business can generate a lot of paper losses,” Wilson said. “There might be other businesses that have a lot of depreciation. But, really, you would expect to see it in real estate.”
Altogether, the expanded income tax breaks for businesses in the CARES Act are expected to save companies and their owners more than $240 billion over the next two years, although some of that would be recouped through higher tax collections in later years, assuming Congress does not extend the breaks beyond 2020.
By comparison, the federal government will spend an estimated $290 billion to send most Americans checks of up to $1,200 per adult and $500 per child.
But experts say the true price tag of the business tax breaks will likely turn out to be much larger than anticipated, because congressional analysts estimated the impacts using a pre-pandemic economic forecast that is now clearly and badly out-of-date.
“This is going to end up costing more than we expect it to,” Pomerleau said.
jgarcia@orlandosentinel.com; @Jason_Garcia
