BP seeks $9.9 billion tax credit for oil spill costs
Posted by AccountingWEB in Tax, Accounting & Auditing on 07/28/2010 - 15:31
On the same day it announced a $17 billion loss for the second quarter of 2010, BP this week said that it plans to claim a $9.9 billion taxation credit from the U.S. government for costs incurred during the oil spill cleanup operation in the Gulf of Mexico. Jason Bramwell reports.
In its second-quarter earnings report, BP revealed that it would record a charge of $32.2 billion to reflect the impact of the oil spill, which entered its 100th day yesterday. Those costs include $2.9 billion for the response and a charge of $29.3 billion for future costs, including the $20 billion escrow fund established to compensate people and businesses affected by the oil spill.
"We expect we will pay the substantial majority of the remaining direct spill response costs by the end of the year. Other costs are likely to be spread over a number of years, including any fines and penalties, [and] longer-term remediation, compensation, and litigation costs," outgoing BP CEO Tony Hayward said in a press release. Robert Dudley will become the first American to lead the London-based energy company when he succeeds Hayward as CEO in October.
Under U.S. corporate tax law, companies can take credits on up to 35 percent of their losses. That means BP could save approximately $10 billion on its U.S. tax bill. However, The Washington Post reported July 27 that the tax credit could mean taxpayers will indirectly foot part of the bill for the $20 billion-compensation fund.
White House press secretary Robert Gibbs reiterated this week that American taxpayers will not be responsible for any costs related to the oil spill. When asked whether BP should pursue the tax credit, Gibbs said, "I don’t think anybody would prefer that they do that. There are tax laws in this country that have been written for quite some time."
"The [Obama] administration will ensure that any action that BP takes respects the law as it is," Gibbs added.
According to The Washington Post report, policymakers crafted the tax code so companies can spread their profits and losses over more than just one calendar year. For example, a company could make $100 billion one year and pay the U.S. corporate tax rate of 35 percent, or $35 billion, and lose $100 billion the next year when the economy goes south. Over those two years, the company made nothing, but still paid $35 billion in taxes.
From the tax code's perspective, the company overpaid in previous years. To rectify this, companies can claim a credit, also at the 35 percent rate. Companies can seek a refund for taxes paid from the previous two years or, if there is money leftover, carry the credit forward up to 20 years, the report stated.
U.S. Rep. Eliot Engel (D-NY) criticized BP for its pursuit of a tax break at the expense of the American people, calling it "simply shameful."
"If this is not proof positive that corporate greed is out of control, then I shudder to think what could be next. When Goldman Sachs [Group Inc.] was fined over $500 million due to their business practices, they did not seek tax deductions [last month], as was their right. When your company is making Goldman Sachs look like a model of corporate behavior, then you have clearly lost any credibility," Engel said in a written statement.
"Claiming billions of dollars in losses is an affront to the hardworking people of the Gulf Coast who have lost their livelihood as a result of this spill," Engel said. "I call on BP to show, for once, a glimmer of humanity in this situation and halt its claim for this tax break immediately."
Related articles:
- Gulf fishermen see livelihoods disappear, region’s economy suffers
- BP's public relations gaffes causing British companies problems in the U.S.
- Louisiana businesses must plan for the future now
- 3668 reads
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BP Tax Credit
THIS ARTICLE IS A GOOD PRESENTATION OF AN ONGOING CONTRAVERSIAL FINANCIAL/TAX ISSUE--TAX CREDITS. IF THEY ARE LEGAL FOR AMERICAN CORPORATIONS, THEY PROBABLY SHOULD BE LEGAL FOR FOREIGN CORPORATION OPERATING IN THE US.
Obama Slush Fund
So you want BP to be taxed on their "excess profits" but when they have losses, they should forget about them?? They need the $9B to pay for the Obama Slush Fund he made them establish, with no controls.
Rod Scott
You would. I would.
BP is going to take every deduction and credit it is entitled to under the tax code. You would. I would. And if I don't on a client's return it is malpractice.
Charles D. Grass, CPA, ATA, ATP
Grass CPA & Associates, ps
BP should most certainly get the tax break.
BP should most certainly get the tax break. They will pay penalties if there is a criminal verdict against them.
Surprisingly no one has mentioned that the only reason the IRS is footing part of the bill is because of the income tax. The best way to reduce the government portion of the bill is to reduce the tax rate.
Damian Kennedy, CPA
Seems like a tax credit
While technically the tax issue affecting BP's expenses relating to the oil spill cleanup and the payments to victims has to do with a legitimate deduction for these expenses, the net effect is expected to result in a loss for BP which can be carried back and applied to taxable income in two previous years. This is expected to generate a tax benefit and because said benefit would actually result in the government writing BP a check for somewhere in the neighborhood of $10 billion when we all know our government doesn't exactly have $10 billion sitting around looking for a worthy recipient, the resultant anger over this issue isn't surprising. And because the carryback will result in such check having to be written, the tax benefit is being likened to a credit in the press.
Gail Perry, managing editor
This is a phony issue, drummed up by the politicians.
This is a phony issue, drummed up by the politicians.
Suppose a company has $10 billion of net income, and then incurs a $15 billion cost to clean up an oil spill it causes. The company has lost $5 billion for the year, but the politicians expect it to pay over $3 billion in tax?
Thomas C. Daley, CPA
Bowers, Narasky & Daley, LLP
All the wrong moves.
BP is making all the wrong moves. From taking risky cost cutting shortcuts in its oil well development to the CEO's less than forthright and insensitive comments and yacht racing holiday and now on to seeking a massive US tax credit for its related losses, BP is earning its way to become Corporate Slugs of the Year. While the US tax code as written may allow this deduction as BP trumpets, it is an atrocity to effectively bill Americans for $10 billion of the clean up costs. Just ask the Gulf fishermen or the hotel owners on the formerly white sandy beaches how they feel about helping pay for the utter mess caused by BP's negligence. So our tax code focuses on minutia like disallowing a $100 loss on a stock where an investor buys it back within 30 days, but it neglects outrageous tax deductions from foreign behemoths with many years of outrageous profits that are now incurring costs that may well be deemed to be caused by gross negligence? Sorry, it just doesn't fly BP (Behemoth Polluter)!
It is a business decision and lawful.
It is a business decision and lawful. If we start to question the morality of the lawful decision then not only we need to look at BP, but also at many other companies irrespective of the amount.
Do individuals and small companies try to minimize their tax liability? Is that moral? If US Govt. and public does not want BP to operate in the US, then the US Govt. should shut down BP and seize all its assets. However, making a distinction on an individual basis is discriminatory. It will have lot of other implications. Greed and Mistakes have existed in the past and will be there in the future.
Suneel Maheshwari
Professor & Division Head (Interim)
Division of Accountancy & Legal Environment
Marshall University
The article and your commentary...is just stupid.
The article and your commentary regarding BP's claim of a $9.9 Billion credit is just stupid (as well as, U.S. Representative Engel's comments). First, they are not entitled to "credit". The costs incurred to settle claims, pursue clean-up efforts, damage to business assets, etc. are deductions against income under I.R.C. section 162. If the deductions exceed income the excess deductions create a net operating loss deductions which can be carried back two years to reduce prior income or forward 20 years and reduce future income. Assuming they paid taxes in the prior years they may be entitled to a refund. That is all well and good and may be a bit of "splitting hairs".
However, apparently what seems to be missing from your analysis is that the Internal Revenue Code does not provide that claiming deductions for business expenses is an elective provision if the a taxpayer incurs an expense in his business that expense has to be reported in calculating taxable income. For BP not to claim the expense would be a violation of the tax law.
With respect Goldman, Sachs, they did not claim deductions for the civil penalty paid to the SEC because under IRC section 162(f), "no deduction shall be allowed ... for any fine or penalty paid to a government for violation of any law". Therefore, to imply they were doing something honorable by not claiming the deduction is simply hogwash. As it is to imply that BP is doing something sinister by following the law and claiming the deductions that are required to be taken in calculating its taxable income.
Tony Bakale, CPA, Cohen & Company
This is truly outrageous.
This is truly outrageous. If they are taking a $9.2B current cash credit against a $20B proposed reserve, a large portion of which may never be paid and that portion that will be paid will probably be spread out over several years, it should be disallowed under the code as not being supported. They should only be allowed a deduction for amounts actually paid out to claimants. It is important that the $20B is going into an escrow account – any amounts not expended will be returned to BP.
Outraged
Accountants are supposed to deal with facts not opinions.
Accountants are supposed to deal with facts not opinions. BP is either entitled to the credits or is not! I'm sure they have plenty of PR people and lawyers to advise them on the law and how to respond to their huge mistakes.
Perhaps we should suspend the ability of convicted murderers and rapists to appeal their sentences (take advantage of the law) or forget about Tax Court and Appeals.
Our current administration is in the process of dismantling the rights of US citizens by imposing ever increasing burdens of taxation and spending on us and our children. Please don't encourage this process.
Jerry W. Slade, EA, eTaxMasters
BP should absolutely take the credits.
BP should absolutely take the credits they are entitled to under the tax code. When our government starts dictating who can take credits based on who they are as a company, or how they operate we are all in real trouble. The federal government has already claimed they were going to fine BP, is this just an addition to that fine.
Paul K Edwards, CPA/ABV, ASA, EKS&H
The law is the law.
If BP is entitled to the deduction then they should be able to claim it. The law is the law and any attempt to retroactively change it is not appropriate. The impact of the spill is extremely damaging to all involved but that damage is not mitigated by denying BP their rights under the law.
Brad Rives, E.ON U.S.