Accumulation of Tax-Loss Carryforwards: The Role of Book-Tax Non-Conformity
41 Pages Posted: 14 Jun 2016 Last revised: 26 Jan 2017
Date Written: June 13, 2016
Using confidential corporate income tax return data, this paper investigates the association between book-tax non-conformity (measured as book-tax differences) and tax-loss carryforwards (TLCFs). I find that TLCFs are positively associated with temporary and permanent book-tax differences. Only firms with positive pre-tax book income and negative taxable income (double-picture firms) drive the positive association between TLCFs and temporary book-tax differences. Conversely, the positive association of TLCFs and permanent book-tax differences is present for double-picture firms and the remaining firms. The results suggest that double-picture firms, which feature high TLCFs compared to their size and to the remaining firms, use temporary book-tax differences to report a lower taxable income than pre-tax book income. Thus, this paper contributes to the understanding of the drivers of rising TLCFs. This is important, as offsetting TLCFs against future profits jeopardizes a country’s tax revenue.
Keywords: Loss firms, Book-tax differences, Corporate taxation, Public finance
JEL Classification: H25, H32
Suggested Citation: Suggested Citation