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Unformatted text preview: Partial Loss Refundability: How Are Corporate Tax Losses Used? 651 National Tax Journal Vol. LIX, No. 3 September 2006 Abstract - Using tax return data for19932003, we measure how US corporations use tax losses over time. For fi rms included in our dataset, we fi nd that: (1) approximately 5060 percent of tax losses are used over a tenyear window as a carryback refund or loss carryforward deduction; (2) approximately 1020 percent remain to be used; and (3) approximately 2530 percent are never used. Moreover, many tax losses are used only after a substantial delay. Hence, we fi nd that certain fi rms and industries incur a signifi cant penalty from the partial loss refund regime due to the erosion in the real value of their tax loss. INTRODUCTION T he asymmetric treatment of tax losses is an attribute com- mon to all corporate income tax systems. If a corporations income exceeds allowable deductions, then its net income is taxed at the statutory rate. However, if the reverse holds true, a corporation does not receive a refund equal to the tax value of its loss. Instead, corporations must carry losses backward or forward in time to offset prior or future payments of tax. In most cases, fi rms are forced to carry some portion of their tax loss forward. Carryforward fi rms receive only a partial refund of their tax loss because the real value of the loss erodes over time. For certain fi rms, losses that are carried forward have no inherent value as the fi rm is unable to generate suffi cient taxable income to ever utilize the loss. The partial refundability of tax losses has important impli- cations for researchers interested in corporate investment and fi nancing decisions. Firms that carry losses forward may face very different marginal tax rates on investment compared to fi rms that do not carry losses forward. If the investment is debt fi nanced, then any marginal tax rate discrepancy could increase. Researchers who ignore the implications of the corporate loss regime risk omitting a key factor that may ex- plain why otherwise similar fi rms have different investment patterns. It may also explain why certain industries appear to be less responsive to tax incentives such as accelerated deprecation. Partial Loss Refundability: How Are Corporate Tax Losses Used?* * Disclaimer: Any views or opinions contained in this paper should not be construed as representing the views or policies of the US Department of Treasury. Michael Cooper & Matthew Knittel Offi ce of Tax Analysis, US Department of Treasury, Washington, DC 20220 NATIONAL TAX JOURNAL 652 Whether the corporate loss regime has a perceptible impact on marginal tax rates depends upon the prevalence of loss carryforward fi rms and the relative size of firms loss carryforward stock....
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This note was uploaded on 04/05/2011 for the course ACC 310 taught by Professor Drogt during the Fall '10 term at Grand Valley State University.
- Fall '10