Chicago Fed Insights

Financial Positions of U.S. Public Corporations: Part 4, Tax Relief

May 19, 2020

This blog post is the fourth in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response.

In this post, we discuss the adjustments to federal tax policy that have been initiated to support U.S. businesses and their possible effects. These measures represent a significant fiscal cost ($280 billion over ten years) and an even larger positive cash flow effect for businesses in 2020 (over $700 billion), because some measures are effectively loans. However, the measures are also relatively untargeted, i.e., they are not restricted to the industries or firms most significantly impacted by the pandemic. Because of this, we expect that they are unlikely to reduce substantially the number of firms facing illiquidity or insolvency, and as a result their aggregate effects on investment or employment could be relatively small.

Why use business tax policy in response to the pandemic?

One important aspect of the federal policy response has been to use tax policy to support corporations. In normal times, tax policy affects corporate decision-making primarily by altering firms’ incentives to undertake investment and other value-creating projects, for example, by affecting the user cost of capital. In this instance, however, measures taken have had essentially no effect on these incentives. Rather, tax policy has been deployed to reduce the risks of illiquidity or insolvency resulting from the huge negative cash flows currently being experienced by some corporations, and which we discussed in our previous post.

Tax policy can address these risks in two ways: First, it reduces liquidity problems by reducing tax payments due now or in the near future (and sometimes rescheduling them to a later date); second, it improves the financial positions of corporations by reducing their tax payments overall (i.e., taxes due at any point in time), thereby reducing their risk of insolvency.

Theoretically, for firms that are not facing significant liquidity shortfalls, we would expect little change in real outcomes from a tax change that does not affect incentives. For instance, delaying tax payments for a company with large liquidity should have negligible effects on its investment or employment decisions. However, for firms that are cash-constrained (or expect to be cash-constrained soon) an infusion of cash may increase investment or employment. For tax policy to be effective at increasing investment or employment then, it ought to target the firms most affected by the Covid-19 pandemic.1 The difficulty, from the policymaking standpoint, is that it is not perfectly clear which firms are most affected, and designing policies to target certain firms is difficult. An additional problem is that reductions in tax payments must also reach the firms they target in a timely manner. For example, a tax refund that is only paid to a firm at the end of the (fiscal) year will not immediately help improve its liquidity position.

Overall effect of the tax measures

Most of the business tax measures so far have been implemented as part of the CARES act, passed on March 27, 2020.2 We estimate that the incremental cash flow generated by these business tax measures for 2020 is approximately $700 billion. On top of that, the Department of the Treasury extended tax payment deadlines, which we estimate generates around $90 billion in additional cash flow until July 15 for C-corporations3 and a similar-order-of-magnitude amount for other businesses.4

These numbers can be compared to an annual cash flow from operations of about $3 trillion for nonfinancial corporations in the U.S. in 2019. Thus, the direct cash flow relief provided by this part of the policy response is substantial.5 However, only about $70 billion is directly targeted toward the most affected businesses, and some of this relief may not reach them very quickly.

Because of this limited targeting and lack of timeliness of the most targeted measures, and because the incentive effects are small, we would expect these measures to have a positive but limited macroeconomic effect. The macroeconomic effect arises because some companies may be cash-constrained, and hence will react positively to a cash injection; moreover, these measures may reduce somewhat the number of firms affected by illiquidity or insolvency.

Finally, it is worth noting that, since several of the tax measures simply reschedule taxes, rather than reducing or canceling them, the expected cost to the taxpayer is much lower than the face value of the measures—about $280 billion.

Before we discuss the main measures, note that although our blog series so far has focused on public nonfinancial corporations, here we are reporting the overall tax policy effect on all businesses—including financial businesses, private businesses, and businesses that are not corporations (e.g., partnerships or sole proprietorships). This is because we do not have detailed information for public nonfinancial firms alone.

Tax measures affecting corporations taken so far

Table 1 summarizes the key measures,6 which we now describe:

  1. Delaying payment of payroll taxes

    All companies7 are now authorized to stop paying their (employer) share of social security taxes, starting March 27 and until the end of 2020. (For most employees, this share is 6.2% of compensation, subject to the social security cap.) Half of the taxes due will have to be paid by the end of 2021 and half by the end of 2022. This amounts to about $350 billion, at a low fiscal cost of $12 billion since this is essentially a short-term loan to all companies.8 This measure is large, and it is timely since it starts immediately. However, it is also completely untargeted: It applies to almost all companies, regardless of how much they are affected by the pandemic.

  2. Extending corporate and personal income tax deadlines

    The deadline for paying corporate and personal income taxes has been extended from April 15 or June 15 to July 15.9 We estimate10 that this generates roughly $90 billion of temporary cash flow for C-corporations and probably a roughly similar amount for other businesses. Similar to the payroll tax delay, this is a large measure, with little fiscal cost, that is timely, but not targeted.

  3. Deducting past and present losses

    This measure temporarily increases the deductibility of past and present losses. Specifically, companies that lost money in either 2018, 2019, or 2020, but had a taxable profit in any of the five years prior to that loss (so back to 2013 for 2018 losses), will be able to get a tax refund by refiling their 2018 or 2019 taxes, or when filing their 2020 taxes, by using the losses to offset their previous income. Hence, the potentially large 2020 losses can carryback against 2015–19 income.) The overall cash flow effect is about $239 billion (combining C-corporations and other businesses), with a total fiscal cost of around $195 billion, so this is also a large measure.

    In terms of effectiveness, this measure is timely because businesses that had losses in 2018 or 2019 but taxable income prior to that may get very quick relief by refiling their past taxes. However, it is not well targeted: There is no reason to believe that these businesses are the most affected by the pandemic. On the other hand, businesses that were profitable before the pandemic and will lose large amounts in 2020 will get a significant refund. For these companies, this change is well targeted, but it is not timely, because companies will receive a refund only after filing their 2020 taxes (though some companies might be able to borrow against the anticipated refund).11

  4. Refundable payroll tax credit

    Companies that have been significantly affected by the pandemic12 are entitled to a refundable payroll tax credit of up to 50% of wages (up to a wage of $10,000 per worker) for the period March 12, 2020 to January 1, 2021. This provides a little over $50 billion in targeted support, though the eligibility requirement may delay processing.

  5. Increasing deductibility of interest payments

    Finally, the CARES act temporarily increases the deduction for interest payments on debt. This is expected to increase cash flows by about $12 billion, and it will benefit highly indebted companies. So it is reasonably well-targeted, but this is a fairly small program from a macroeconomic point of view.13

Table 1. Summary of key tax relief measures

Tax relief measure Which businesses are affected? Cash flow effect in 2020 Fiscal cost (over ten-year window)
Defer payment of payroll taxes Everyone (except PPP participants) $351 billion $12 billion
Delaying income tax payments until July 15 Everyone $90 billion for C-corps
Unknown but roughly similar for other businesses
Payroll tax credits Highly affected companies $54 billion $54 billion
Change in loss deductibility All businesses with losses in 2018–20 and taxable income in previous five years For C-corps: $89 billion
For other businesses: $140 billion
For C-corps: $25 billion
For other businesses: $170 billion
Change in interest deductibility All businesses with high leverage and taxable income $12 billion $12 billion


In this blog post, we reviewed five recent important tax changes affecting corporations. These have substantial cash flow impacts in 2020. However, few are targeted toward the firms most directly and substantially impacted by the Covid-19 pandemic. Because of this, we expect that they are unlikely to reduce substantially the number of firms facing illiquidity or insolvency.


1 We assume here that tax policy should target companies at risk of insolvency or illiquidity due to the pandemic, but not necessarily companies at risk for other reasons.

2 More details on the Coronavirus Aid, Relief, and Economic Security Act available online.

3 The U.S. tax code distinguishes C-corporations, which are taxed directly, from S-corporations, which are not taxed, but whose owners are taxed based on the income of the corporation (“pass-through” entities). On top of that, there are businesses that are not corporations (e.g., partnerships and sole proprietorships).

4 These numbers are based on our interpretation of the analysis by the Joint Committee on Taxation (JCT). The Congressional Budget Office has also published an analysis that is very similar to that of the JCT.

5 Note, however, that nonfinancial corporations do not include all businesses.

6 We do not consider the payroll protection program (PPP) in what follows since it does not apply to the large public corporations that are our focus.

7 Except those that used the payroll protection program (PPP).

8 There is, in principle, some credit risk if the corporations became insolvent, however.

9 Personal income taxes are relevant, since many corporations in the U.S. elect to “pass through” their taxable income to their owners (e.g., S-corps).

10 This estimate is based on last year’s daily Treasury statements (available online, here and here).

11 To understand better the mechanics of the change, note that prior to the TCJA tax reform of 2017, corporations could deduct losses against future income for 20 years (carryforwards), and could also deduct losses against the past two years of income (carrybacks). TCJA changed this: Corporations can now deduct losses against future income for an unlimited period, rather than 20 years, but losses can offset at most 80% of your income. Moreover, carrybacks were disallowed. The CARES act temporarily releases these constraints. First, carrybacks are allowed again for 2018–20, and going back five years. Second, the 80% cap is lifted during 2018–20. These changes are potentially quite valuable (hence the large fiscal cost) as losses can be deducted against past income, which was taxed at a 35% marginal rate. There are some complications, however, in particular interactions with international minimum taxes, so multinationals might get less relief. CARES also corrects a “typo” in TCJA that made it impossible for companies with fiscal years straddling Dec 31, 2017, to use carrybacks for that year.

12 To be eligible, companies must either (1) have been ordered by a government to suspend or reduce business operations, or (2) have their sales fall by over 50%. This program is subject to various conditions, and it is not available for companies that receive a loan under the PPP.

13 To understand the mechanics, note that the TCJA tax reform limited the deductibility of interest payments to (approximately) 30% of EBITDA. The CARES act increases this limit to 50% for 2019 and 2020 tax years. Moreover, corporations are free to use their 2019 income rather than 2020 income as a way to calculate the limit (if 2020 income is low, this increases the limit and avoids running into the cap). However, this holds only for the 2019 and 2020 tax years, so interest that is paid in 2021 will be subject to the usual cap. (Moreover, under current law, this cap is scheduled to fall further in 2022, because the limit will be calculated as a function not of EBITDA but of earnings after depreciation allowances.)

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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