WASHINGTON – Oil and gas companies that have struggled for years under low crude prices are reaping hundreds of millions of dollars in tax refunds under a provision of the $2 trillion stimulus package passed by Congress in March.
From restaurants to airlines, companies across industries are taking advantage of the statute, which was intended to help otherwise financially sound businesses carry through an unprecedented economic downturn caused by the coronavirus pandemic — reaping an estimated $25 billion in tax savings over the next decade.
But the provision is of special use to the U.S. oil and gas industry, which was enjoying historic profits up until late 2014, when a glut of crude coming out of U.S. shale fields and the Middle East crashed global prices. Crude prices rose gradually in the years ahead but never came close to earlier highs of more than $100 a barrel, putting increasing numbers of companies under financial pressure.
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Under the CARES act, any U.S. company can take net operating losses they suffered from 2018 to 2020 and deduct them from tax returns filed as far back as 2013 to claim retroactive refunds from the Internal Revenue Service — a break from recent practice of only allowing companies to carry losses forward to future tax years. That allows oil companies to use losses suffered not only during the pandemic, but also in the difficult two years leading up to the coronavirus, to claim refunds of tax payments made in better times.
For instance, the Houston oil field equipment manufacturer National Oil Well Varco, which has reported more than $9 billion in losses over the past five years, claimed a tax benefit of $123 million through the stimulus package, the company reported earlier this month. Likewise, Diamond Offshore, the Houston drilling contractor which filed for bankruptcy in April after years of losses, reported a tax benefit of $9.7 million.
At least 37 oil producers and service companies have claimed the benefit, according to Bloomberg News, which first reported the oil sector’s use of the tax provision.
“Oil and gas is a little peculiar in its boom and bust cycle,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, a Washington think tank. “They’re volatile in earnings and happened to have the advantage of having large 2019 losses and profitable earlier years they could carry those losses back to.”
While President Donald Trump has pledged to do anything he can to keep the oil and gas sector solvent, he has generally met resistance in Congress and even within his own administration about bailing out oil companies that might have taken on too much debt long before coronavirus cases started popping up.
But the CARES act provision has offered oil companies struggling under heavy debts some breathing room at least, if not a lifeline.
For instance, Occidental Petroleum, which last year took on some $40 billion in debt to acquire The Woodlands oil and gas company Anadarko Petroleum, was able claim a $195 million tax benefit from the CARES act, the company reported earlier this month. Last year, the company reported an almost $1 billion loss on increased debt costs and their stock is down more than 60 percent since the beginning of the year.
Investment-grade companies have employed the tax benefit as well. Valero, the San Antonio refiner, said it applied expected losses from the coronavirus to its 2015 tax year, when it reported a $4.1 billion profit and paid an income tax rate of 35 percent. Phillips 66, the Houston refiner, reported its federal tax rate for the first three months of 2020 effectively declined to just 2 percent, in part due to the CARES Act.
The tax provisions “are a tried-and-true tool for assisting U.S. taxpayers in difficult economic times. Similar to other companies across many industries, we will follow the tax laws in the manner intended by Congress,” Dennis Nuss, a spokesman at Phillips 66, said in a statement.
Democrats are pushing to roll back the tax provision. Under a new $3 trillion stimulus package passed by House Democrats last week, companies could not apply losses to tax years prior to 2018, the year after Trump and a Republican-controlled Congress cut the corporate tax rate from 35 percent to 21 percent.
Most of the oil companies cited in this story would not comment. But the American Petroleum Institute argued the tax provision under the CARES act was critical to keeping American companies afloat.
“Companies across the economy – from airlines and manufacturers to farmers and retailers – are taking into account the latest tax provisions approved by Congress, which are not unique to our sector and apply to all businesses that are experiencing financial hardship during the COVID-19 pandemic,” Stephen Comstock, a vice president at API, said in a statement.
A review of filings with the Securities and Exchange Commission shows a diverse group of companies taking advantage of the CARES Act tax provision. Houston food distributor Sysco said it would allow the company to defer taxes due later this year. Spirit Airlines said it claimed at $12.1 million tax benefit by rolling back losses to earlier tax years.
Both the National Restaurant Federation and the National Retail Federation, each representing industries among the hardest hit by the economic consequences of the coronavirus pandemic, put out advisories to their members about taking advantage of the tax provision.
“This means companies that have a loss will be able to ‘carry back’ the loss to profitable years up to five years earlier and quickly obtain refunds,” the retail federation wrote.
In addition, wealthy individuals in sectors such as real estate and hedge funds are claiming on average $1.6 million in tax relief through another tax provision of the CARES act, which does away with limits on the losses individual taxpayers can claim, according to the Congressional Joint Committee on Taxation. And the tax benefits claimed so far by corporations and wealthy individuals under the CARES Act is just the beginning.
The full economic damage from the coronavirus has yet to be reported. And when companies do, they the scale of refunds that might result in the IRS sending out more in refunds than it collects in corporate taxes, Rosenthal said.
“Most everyone is going to have a devastating 2020,” he said. “We’re going to see a lot of claims next year.”