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.”
The lead sponsors of the two net operating loss bills are Arizona Republicans David Schweikert in the House and Martha McSally in the Senate. Phoenix-based PetSmart, which sells pet food, furniture, supplies and services like dog grooming and boarding, is lobbying for the measures, according to records filed with the Senate.
n a statement, PetSmart said it has been urging Congress to ensure “companies are treated fairly regardless of what date they end their fiscal year. This drafting error has put PetSmart at a significant disadvantage which was clearly not the intent.”
PetSmart is “a local company for me,” said Schweikert, who represents northeast Phoenix.
McSally is one of the most vulnerable senators up for reelection this year, with her race ranked a Toss-up by Inside Elections with Nathan L. Gonzales. Aides to McSally didn’t respond to a request for comment.
It’s not just retailers who are affected. Nissan, the big Yokohama, Japan-based car manufacturer, is pushing for a fix because its fiscal year ends on March 31. “Congress did make a mistake; it was an honest mistake,” said Tracy Woodard, director of government affairs for Nissan North America.
Nissan’s U.S. headquarters are in Franklin, Tennessee, and the company has manufacturing facilities elsewhere in Tennessee as well as Mississippi. Tennessee GOP Sens. Lamar Alexander, who is retiring after this Congress, and Marsha Blackburn, as well as Mississippi Republican Cindy Hyde-Smith are co-sponsors of McSally’s bill, as is Arizona Democrat Kyrsten Sinema.