The coronavirus relief package signed into law in March gave money-losing companies the right to carry losses backward for up to five years, a move intended to help cash-strapped firms struggling amid the coronavirus shutdown get larger refunds from the IRS.
The rule change enables companies to get refunds now on taxes they paid at a 35% rate, before the 2017 tax cuts reduced it to 21%. This creates an opportunity for “rate arbitrage,” says Richard Rubin of The Wall Street Journal, in which companies load up on deductions today while pushing income into future years, and claim refunds based on taxes paid in prior years, when the tax rate was higher.
Here’s how Rubin describes the process: “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.”
Nearly two dozen publicly traded firms have already reported benefits from the rule totaling more than $2 billion, and that number is expected to grow. “We’re going to see some of the biggest firms in the U.S. economy benefit,” Rebecca Lester, a Stanford University accounting professor, told Rubin.
One example Rubin discusses is FedEx, which has recorded a tax benefit worth $71 billion from the refund rule change and is seeking permission to add another $130 million. It’s not clear how much the company needs the cash, though. At the end of May, the company reported holding $4.9 billion in cash and equivalents.
The arbitrage opportunity is not without critics, who question the need to give tax breaks to companies sitting on billions in cash. “The appetite for corporate tax breaks is truly insatiable,” Rep. Lloyd Doggett (D-TX), told Rubin. “Now, it’s like time travel.”