National Retail Federation Urges House to Pass Carryback Act

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The National Retail Federation (NRF) told a House committee today that some retailers could be forced to lay off workers or close stores unless Congress moves quickly to pass “net operating loss carryback” tax legislation that would give them the cash they need to buy inventory for this year’s holiday season.

“Because retail sales have fallen so dramatically over the past year and access to capital has been so limited, retailers are struggling to find the cash they need to operate their businesses as the economy moves toward recovery,” said NRF Vice President and Tax Counsel Rachelle Bernstein. “If struggling retailers cannot finance inventories for the 2009 holiday season – their greatest opportunity for revenue for the year – they could go out of business. Extension of the NOL carryback period would provide an important source of capital to finance ongoing operations and retain employees. If NOL carryback is not enacted soon, tens of thousands of additional retail jobs will be lost.”

Bernstein testified this morning before the House Small Business Committee during a hearing on tax provisions set to expire at the end of the year.

Bernstein said Congress needs to pass H.R. 2452, the Net Operating Loss Carryback Act, sponsored by Representative Richard Neal (D-Mass.), chairman of the House Ways and Means Committee’s Select Revenue Subcommittee. Under the legislation, businesses suffering losses during 2008 or 2009 would be able to “carry back” those losses to offset profits from up to five years ago. The companies would then receive tax refund checks that would provide an infusion of cash to help keep doors open and workers on the payroll. Losses can already be carried back for up to two years, but in the current economic climate some companies have seen low profitability for several years.

The five-year carryback period was included in the $787 billion economic stimulus bill signed into law by President Obama in February, but was limited to companies with up to $15 million in annual gross receipts and applied only to losses suffered during 2008. Obama’s budget proposal for Fiscal Year 2010 would allow the five-year period to apply to companies of any size and to losses from either 2008 or 2009, as provided under the Neal legislation. Bernstein said the expansion is needed because larger businesses are seeing losses as well as small companies, and that losses in 2009 have been even larger than 2008.

Bernstein said some retailers are “struggling to survive” and don’t have sufficient cash to buy inventory for the impending holiday season, which generates between 25 percent and 50 percent of most merchants’ annual revenue. She cited as examples one small specialty chain with 2,000 permanent employees and 6,000 seasonal workers where the NOL money “could mean the difference in staying in business,” and another specialty chain that might be forced to close one-third of its stores and eliminate 800 jobs. The retail industry has lost more than 800,000 jobs since January 2008 and sales are continuing to show year-over-year declines.

Most companies are not on the brink of survival, but some could face additional downsizing without sufficient operating capital. For others, extension of NOL carryback would allow them to make improvements to their stores and other new investments that would create badly need jobs, Bernstein said.

In addition to being carried backward, tax law allows net operating losses to be carried forward and applied against future profits for up to 20 years. Bernstein said that means the proposed five-year carryback period is “merely an advance on a tax refund that would be due to them in the future” but would come in time to make a difference in whether a company survives.

Bernstein also asked the committee to support renewal of a 15-year depreciation period for remodeling and other improvements to retail stores and restaurants that is set to revert to the previous 39 years at the end of 2009. The economy has already forced many retailers to delay remodeling plans into 2010, resulting in severe job losses in the construction industry. Higher after-tax costs that would come if the provision is not renewed could cause further delays and more loss of construction jobs, she said.