Implications of Tax Loss Asymmetry for Owners of S-Corporations

61 Pages Posted: 2 Jun 2020 Last revised: 9 Jun 2021

See all articles by Lucas Goodman

Lucas Goodman

U.S. Department of the Treasury

Elena Patel

University of Utah - Department of Finance

Molly Saunders-Scott

Government of the United States of America - Congressional Budget Office (CBO)

Date Written: June 2021

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

Suggested Citation

Goodman, Lucas and Patel, Elena and Saunders-Scott, Molly, Implications of Tax Loss Asymmetry for Owners of S-Corporations (June 2021). Available at SSRN: https://ssrn.com/abstract=3592884 or http://dx.doi.org/10.2139/ssrn.3592884

Lucas Goodman

U.S. Department of the Treasury ( email )

1500 Pennsylvania Avenue
Washington, DC 20220
United States

Elena Patel (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Molly Saunders-Scott

Government of the United States of America - Congressional Budget Office (CBO) ( email )

Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515-6925
United States

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