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The policy behind BP's potential $10B tax refund

My story in today's paper explains how the tax code allows BP to claim a $9.9 billion tax refund because of its losses from the oil spill.

Policymakers crafted the tax code this way so that companies can spread their profits and losses over more than just one calendar year. Let's say a company makes $100 billion one year and pays the U.S. corporate tax rate of 35 percent, or $35 billion. The next year, the economy goes south, and the company loses $100 billion. Over those two years, the company made nothing but still paid $35 billion in taxes.
From the tax code's perspective, the company overpaid in previous years. To rectify this, companies can claim a credit, also at the 35 percent rate. Companies can seek a refund for taxes paid from the previous two years or, if there's money leftover, carry the credit forward up to 20 years.

This is what's called a loss carryback, and the amount of time companies can look backwards to offset previous taxes is a big deal for them. It's the difference between getting cash back now, versus waiting for future years when profits come back.

Witness the amount of lobbying that went into a temporary extension of the carryback last October. The usual time limit is two years, but business groups wanted lawmakers to extend it to five years temporarily as an instant cash stimulus. According to reporting by the Wall Street Journal, such companies as Liz Claiborne, Office Depot, Brunswick Corp. and Brookstone were all lobbying heavily for the change, which they eventually got.

How much in refunds did they wind up with? $33 billion in 2010, according to estimates by the Joint Committee on Taxation.

By Jia Lynn Yang  |  July 28, 2010; 10:40 AM ET
Categories:  BP , Corporate taxes  
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