Implications of Tax Loss Asymmetry for Owners of S-Corporations

Abstract

In this paper, we study tax loss asymmetry for S corporate owners. These owners use most losses contemporaneously, reducing the tax asymmetry compared to C corporations. However, these owners face distortions due to the progressive individual tax schedule. The value of this asymmetry is approximately \$3.5 billion per year. We find that this asymmetry creates disincentives for risky investment and causes allocative inefficiencies among loss and gains owners. Finally, we simulate the effects of certain provisions of the Tax Cuts and Jobs Act; we estimate that these provisions---especially section 199A---reduces the behavioral distortions of tax loss asymmetry for S corporate owners.

Keywords: Tax loss asymmetry, S corporations, effective tax rates, net operating loss

JEL Classification: H24, H25, H32