Why Do Loss Firms Pay Taxes?

Abstract

In a broad sample of publicly traded firms over the period 1988−2017, we observe that the share of firms reporting pre-tax book losses increased from about 20 to 35%. Of those loss firms, on aver-age 68% have positive cash tax payments (taxpaying loss firms). The amount of taxes paid by these loss firms is substantial and increasing over time. This study seeks to understand this prevalence of taxpaying loss firms. We investigate the determinants of why loss firms pay taxes. We find that book-tax income reporting differences, firms’ multinational vs. domestic status, the occurrence of foreign profits/losses in total losses, different sources of income such as ordinary income vs. capital gains, as well as, special items, firms’ tax loss carry back potential and firm size are important determinants of why loss firms are paying taxes. These variables also are associated with the magnitude of the taxes paid.

Keywords: corporate taxes, losses, corporate tax function

JEL Classification: G39, H20, H25, H26