Extra Incentive for Corps to Lose Money This Year

[maizefolk]

I hadn't come across or thought about the implications of current tax law combined with the COVID induced recession.

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.

When a company is turning a profit, each dollar of loss is worth only $.21 in reduced taxes. But once the company is already losing money for the year, each dollar of losses is worth $.35 in tax refunds. So for a company that is already turning a loss, they should try to move losses that would occur in future years forward to 2020, and defer any profits from this year that they can into future years. In turn, this likely means that while earnings are certainly bad for 2020, earnings and P/E ratios are going to make it look like companies are going even worse than they really are, because of the incentive to try to concentrate losses in this year to maximize tax benefits.

Thought it was an interesting point to keep in mind in interpreting market data for the year, so wanted to share.

[dandarc]

So we're all getting massive bonuses! Woo!

[Alternatepriorities]

I hadn't come across or thought about the implications of current tax law combined with the COVID induced recession.

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.

When a company is turning a profit, each dollar of loss is worth only $.21 in reduced taxes. But once the company is already losing money for the year, each dollar of losses is worth $.35 in tax refunds. So for a company that is already turning a loss, they should try to move losses that would occur in future years forward to 2020, and defer any profits from this year that they can into future years. In turn, this likely means that while earnings are certainly bad for 2020, earnings and P/E ratios are going to make it look like companies are going even worse than they really are, because of the incentive to try to concentrate losses in this year to maximize tax benefits.

Thought it was an interesting point to keep in mind in interpreting market data for the year, so wanted to share.

Only Washington could write a recovery plan that actually makes this year's economic results appear worse than they are... This is one more reason to oppose using the tax code as an instrument to achieve policy/political aims.

[Dr. Pepper]

Not sure it will affect the P/E ratios, earnings reported for the SEC 10K (FASB rules),  can be different from earnings reported for IRS purposes. Most publicly traded companies keep two sets of books.