Businesses hit by mistaken tax penalty seek help from Congress – By Doug Sword (Roll Call) / Jan 10 2020
Drafting error in 2017 GOP tax overhaul hurt retail industry particularly hard
A one-word drafting error in the 2017 tax code overhaul has sent companies ranging from specialty retailer PetSmart Inc. to Nissan Motor Co. scrambling to Capitol Hill for relief.
As part of the effort to offset a dramatic reduction in the corporate tax rate in the 2017 law, Republicans limited the ability of firms to claim tax breaks on net operating losses, or when deductions exceed income.
Under prior law, companies could “carry back” net operating losses to offset taxes paid in the previous two years, generating refunds on those earlier tax bills. They could also “carry forward” such losses for up to 20 years, reducing future tax liability. The 2017 law eliminated carrybacks and imposed new limits on carryforwards, though the 20-year time frame was removed.
According to the Joint Committee on Taxation, the change was estimated to raise $201 billion over a decade, one of the largest revenue raisers affecting businesses. But there was, according to the law’s drafters, an unintentional mistake: The loss carryback elimination and other changes applied to firms’ tax years “ending” after Dec. 31, 2017, rather than “beginning” after that date.
That creates a particularly acute problem for the retail industry, where companies’ fiscal years often end on Jan. 31 rather than Dec. 31, so they have an extra month after the holidays to tally profits and losses.
Retailers are “the poster child of not being a calendar year industry,” said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation. Her group and another representing big retailers, the Retail Industry Leaders Association, is lobbying for legislation that would fix the net operating loss flaw and give affected companies four months to apply for tax refunds.
As a result of the law’s wording mistake, companies whose tax year ended just after the end of calendar 2017 would be hit by the new net operating loss restrictions, meaning companies are penalized for actions taken before the law passed.
“Because of the way it was drafted, it became a retroactive tax increase. That was not their intention,” said Nicole Kaeding, an economist with the National Taxpayers Union Foundation. Senate Finance Committee Republicans pointed out in an August 2018 letter to Treasury Secretary Steven Mnuchin that their clear intent, as outlined in the conference report accompanying the 2017 bill, was to apply the provision to “taxable years beginning after December 31, 2017.”
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