Using tax return data for1993-2003, we measure how US corporations use tax losses over time. For fi rms included in our dataset, we fi nd that: (1) approximately 50-60 percent of tax losses are used over a ten-year window as a carryback refund or loss carryforward deduction; (2) approximately 10-20 percent remain to be used; and (3) approximately 25-30 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.

Recent data present a puzzle: the ratio of corporate tax losses to positive income was much higher around 2001 than in earlier recessions. Using a comprehensive 1982-2005 sample of U.S. corporation tax returns, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income.We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and NIPA corporate profits. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for this differing experience. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged?

This paper examines the implications of the asymmetric treatment of tax losses for U.S. corporations for 1993-2004. We fi nd that partial refunding of tax losses reduces their real values by approximately one-half and produces modest effective tax rate differentials between taxable and non-taxable fi rms. However, if fi rms use debt financing or utilize an investment tax credit, then rate differentials can be signifi cant. We also fi nd that certain industries and younger fi rms disproportionately bear the negative consequences of partial refunding, due to either delayed realization or the inability to use tax losses to offset prior or future profi ts.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractRecent data on corporate tax losses presents a puzzle this paper attempts to explain: the ratio of losses to positive income was much higher around the recession of 2001 than in earlier recessions, even those of greater severity. Using a comprehensive sample of U.S. corporation tax returns for the period 1982-2005, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income.We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and corporate profits as measured by the national income accounts. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for the differing experience of C and S corporations. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged? 1