President Joe Biden has been touting his new alternative minimum tax on the nation’s most profitable companies, even using his State of the Union address to declare: “Now, because of the law I signed, billion-dollar companies have to pay a minimum of 15%. God love them.”
But some big oil-and-gas companies like
The reason? Covid-19. Under the law that enacted the new tax, companies can initially factor in the big losses they suffered during the pandemic in determining whether they’re subject to the tax and how much of their income it applies to. That will enable some companies to delay or reduce the tax’s impact, a Bloomberg Tax analysis shows.
Companies have long been able to use their losses to defray future tax bills, but some practitioners say that’s the kind of tax break that the corporate alternative minimum tax was supposed to cut through—and it doesn’t. That’s an indication that the new tax might have been oversold, some think, and might not be as big a change from current law as some of its advocates suggest.
“It’s kind of a very badly designed tax with a lot of uncertainty still,” said Thomas Brosy, a research associate at the Urban-Brookings Tax Policy Center. “It’s not really what it was needed to be.”
Covid losses will drag some companies’ average profitability over a multiyear period too low for them to be subject to the tax in its first year. Other companies will be able to carry forward their pandemic losses and use them to slash their future tax bills, keeping them under the 15% level. Some companies may save tens of millions or even hundreds of millions of dollars.
Biden “has said this will put an end to big companies paying nothing,” said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy. “That’s clearly not the case.”
150 Companies at Most
Carryforwards aren’t the only break the law provides to companies—there are other “adjustments” to the income subject to the minimum tax, enough so that some think it may not weigh on companies as broadly as advertised.
“It was sold kind of misleadingly,” said Jeffrey Hoopes, a University of North Carolina associate professor of accounting. The tax “has many, many, many different exceptions,” he said.
But those who enacted the minimum tax argue that it will still have a big effect, and that adjustments like making allowances for Covid losses are justified and don’t lessen the tax’s impact.
“I don’t think any of that runs against the purpose of CAMT,” a Senate Finance Committee staff member said, using the government’s shorthand for corporate alternative minimum tax.
As Biden noted, the tax requires big, profitable companies to pay at least 15% in taxes on their book income—the net income they report on their financial statements, which often is different from their taxable income. The congressional Joint Committee on Taxation expects it to bring in $34.7 billion this year and $222.2 billion over 10 years.
But it’s also expected to affect only a relatively small number of companies. Only about 150 businesses would be subject to it, the Joint Committee estimated, based on a preliminary version of the tax; a study co-written by Hoopes after the tax’s passage suggested fewer than 80 companies would have been subject to the tax if it had been in effect in 2021.
In part, that’s because of the way the tax is calculated. Companies are subject to the tax if they have a three-year average of at least $1 billion in financial-statement net income. The tax takes effect for 2023, so initially the average will be based on the results of 2020, 2021, and 2022.
That means the big 2020 pandemic-related losses that many companies suffered will count toward that average—oil companies and travel-related companies whose businesses were crippled as people were forced to stay home, for instance. In some cases, those losses are big enough to keep a company below the average $1 billion threshold, and thus keep it exempt from the 15% minimum tax in its first year.
“Because of the averaging, it may take awhile for some companies to pay any tax liability” under the new tax, said Reuven Avi-Yonah, a University of Michigan law professor who specializes in corporate and international taxation.
Carrying Forward Losses
Occidental Petroleum, for instance, had a 5.8% effective tax rate in 2022 and recorded $13.3 billion in net income for the year. But those profits were more than offset by the company’s $14.8 billion in 2020 losses, suggesting it will be below the $1 billion three-year average and thus won’t have to pay the 15% minimum for 2023.
An Occidental spokesman declined to comment. The company said in its latest annual report that it is still evaluating the tax’s impact and that its low 2022 tax rate was largely driven by a tax benefit from a reorganization of its legal entities.
Marathon Oil had a 4.4% effective tax rate in 2022, and its results are weighed down by $1.45 billion in losses in 2020. While the company’s three-year average income appears to be just over $1 billion, Marathon anticipates it “will be able to defer” any cash liability under the book tax until 2024, in part because of an acquisition, said Chief Financial Officer Dane Whitehead on a February conference call. Marathon could not be reached for further comment.
Even if a company’s 2020 losses don’t make a difference in whether or not it clears the $1 billion threshold, the law allows the losses to be carried forward, defraying future tax payments. They can be used to reduce the amount of income subject to the tax, by up to 80 percent—and they never expire.
Ovintiv, an oil and natural gas company, had a $6.1 billion loss in 2020. It has since returned to profitability and had $3.6 billion in net income in 2022 while paying no taxes—it had a $77 million tax benefit for the year. It won’t be subject to CAMT in 2023, but once it will be, possibly as soon as 2024, some of those losses can be used to defray its tax payments. Ovintiv declined to comment.
Congressional Intent?
The availability of loss carryforwards could have a particularly big effect on growing companies that have regularly recorded losses in the past but are now turning profitable. When their growth takes them into the scope of the tax in future years, they’ll have a Covid-fueled war chest of loss carryforwards ready to put to use.
“The first year they’re subject to the tax, they will have losses to offset that tax,” said David Gonzales, a senior accounting analyst at Moody’s Investors Service who has examined the book tax’s potential effects.
Example: Airbnb, which posted $4.6 billion in 2020 losses, and also had a loss in 2021. But in 2022 it had $1.9 billion in profits, with an effective tax rate of only 4.8%. It could exceed the $1 billion three-year average threshold and be subject to the book tax as early as 2024—and its 2020 losses can then be carried forward to reduce its tax bills. Airbnb didn’t respond to requests for comment.
Congress appears to have set up the tax this way on purpose, to help companies that struggled during the pandemic. While there’s little concrete indication of tax writers’ intentions, the law specifically says losses can be carried forward to reduce the income subject to the tax if the losses occur in “taxable years ending after December 31, 2019”—i.e., starting in 2020.
“I don’t think it’s a coincidence,” said Carol Conjura, a partner at KPMG LLP.
The Senate Finance Committee staff member acknowledged “the intent was to let them use those Covid losses.” Companies actually wanted to be allowed to carry forward pre-2020 losses as well, but tax writers thought looking back to Covid was what was in line with the law’s goals, the staff member said.
Should Tax Be Revised?
Some practitioners don’t see this as surprising. Companies draw headlines when they pay zero in taxes in a given year, but the idea of averaging a company’s tax obligations over multiple years is built into the system and is the fairest way to handle things, they say.
“I don’t find that troubling,” Avi-Yonah said. “There’s no particular reason not to let companies recognize the losses.”
Covid losses were just part of the business cycle, said Alan Lederman, a shareholder at Gunster Yoakley & Stewart PA in Fort Lauderdale, Fla. “The inclusion of a look-back doesn’t really bother me.”
But others note that the book tax also allows for other adjustments to income that are helpful to companies—by providing more favorable treatment of depreciation costs, for example. It’s not a pure tax on financial-statement income.
”A lot of tax breaks that reduce effective tax rates are still in the book minimum tax,” said Kyle Pomerleau, senior fellow at the American Enterprise Institute. “This tax was sold as a way to create this 15% floor on the tax for corporations, without considering why taxes might be below 15% in a given year.”
Gardner thinks policy makers should consider giving the book tax a broader base, and lowering the $1 billion threshold to make more companies subject to it—though he acknowledges that split control of Congress means that such ideas are unlikely to get serious consideration right now.
“I would certainly like to see a robust discussion of how to improve the workings of this tax,” he said. “Strengthen it, not give up on it.”
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