Stimulus Tax Provisions Take Shape

A compromise economic stimulus package that may be released as early as tomorrow will likely retain provisions to extend NOL carrybacks and bonus depreciation allowances.

While President Barack Obama travels around the country drumming up support for an economic stimulus package, corporate tax managers may want to take a closer look at what a new compromise bill may offer. Today a bipartisan group of senators reached an agreement on a substitute version of a proposal that was already passed by the House of Representatives, but that is stalled in the Senate.

The hope is that the new version will make it to the Senate floor tomorrow, giving Congress about a week to work out a compromise that could be sent to the president to meet his February 16 deadline. Whether that tight deadline can be met is anybody’s guess.

In a Grant Thornton advisory, tax partners Mel Schwarz and Dustin Stamper noted that House and Senate bills “still share several important provisions,” including a five-year net operating loss (NOL) carryback period, extension of bonus depreciation into 2009,  and a block on an IRS exemption for companies receiving bailout funds.

Credit Suisse also issued an analysis of the NOL carryback and bonus depreciation provisions, providing estimates of the potential tax savings. In the Credit Suisse advisory, research analysts David Zion, Amit Varshney, and Christopher Cornett explained that the carryback period for NOLs will likely be extended from two years to five years, for losses generated this year and in 2008. Companies can use NOLs to offset taxable income, and thereby reduce the corporate tax bill.

Further, NOLs can be used as a refund of past taxes paid, or a reduction in future taxes due, say the Credit Suisse analysts. However, they contend that a refund “is preferable” for companies with liquidity problems because it gives them a source of cash, a much-needed boost to near-term liquidity, and a chance to put the cash to work now.

Companies were already allowed to apply last year’s NOLs to 2007 and 2006. But if the carryback period is extended, refunds could be applied to taxes paid in 2003, 2004, and 2005, bringing the aggregate maximum refund for S&P 500 companies to about $295 billion. That refund total would fluctuate depending on the losses these companies report in 2008 and 2009.

Credit Suisse also commented on a possible extension of the bonus depreciation allowance into 2009, another way of keeping cash in corporate coffers. The analysts estimate that this could save $54 billion in taxes across the S&P 500 this year, for assets acquired and placed into service during 2009.

The report detailed how the bonus ultimately boosts cash flow: It allows companies to depreciate — for tax purposes — more of an asset’s upfront cost, so they incur higher depreciation expense in the early years of the asset’s life, but lower taxable income. In the end, a company is paying out less cash for taxes.

Credit Suisse expects capital-intensive industries to benefit most from the bonus depreciation allowance, noting that energy companies are likely to save $14.3 billion in taxes in one year, while utilities would likely save $8.3 billion and discretionary consumer goods and telecommunications services would save $6.9 billion and $6.2 billion, respectively.

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