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Kick 'em when they're down: Iowa looks to raise taxes of businesses with losses

April 22, 2009

A little-noticed hidden tax increase advanced in the Iowa House yesterday. The bill (SF 483), primarily touted for putting a cap on corporate welfare tax credits, would also end the ability of Iowa corporations to carry net operating losses back to recover old taxes. Instead, they could only carry losses forward.

This bill is a tax increase on businesses that can least afford it - ones that are losing money. A simple example:

Bob Corporation makes $200,000 in Iowa-source taxable income in 2008, its first tax year. It pays Iowa tax of $17,500. Like with so many businesses, things go bad in 2009 and Bob loses $200,000. Between the two years, Bob has no income. Bob throws in the towel and closes the business after 2009.
Under current law, Bob could carry the 2009 loss back to 2008 and recover the taxes paid. It's a fair result - no income for two years, and no tax. Under the proposed change, Bob would never recover the 2008 tax. The 2009 loss could only be carried forward - a useless privilege when the business closes.

HF 483 has passed the Iowa Senate and was voted out of the House Ways and Means Committee yesterday. If you want it stopped, call your legislator today.

Tags: Iowa tax policy.NOL.

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Comments

Or sell the business so that some other company can take the loss?

Also, do you really think that is a realistic business (make $200k, lose $200k, say "eff it")? I don't think that it is.

Do you think that entrepreneurs able to make $200k in income one year are quick to toss a company to the side?

Posted by: Dustin | April 22, 2009 12:59 PM

Dustin-

First, it's not easy, and is often impossible, to sell losses and have them still be useful, especially when there is no going business. See our Sec. 382 posts.

Second, lots of entrepreneurs tire of the 80-hour weeks - and often the worse business is, the harder they have to work. If things look bleak, it's tempting to look for an easier gig.

In any case, the principle's the same. I could have had the guy break even for four more years before he gives up, but the point is the same - without carrybacks, it's easy to have an effective rate over 100% for a three-year period. Also, NOL carryback repeal is horribly-timed for money-losing companies.

Posted by: Joe Kristan | April 22, 2009 1:54 PM