COVID-19: combat liquidity shortages with immediate loss carryback

The exceptional situation resulting from the COVID-19 threat in Germany, Europe and many other countries places companies and self-employed persons in severe difficulties and threatens numerous jobs. The biggest problem companies and self-employed face is the lack of liquidity caused by the decline in sales, while payment obligations (e.g. salaries, rent) continue. Consequently, voices have been raised for short-term financial assistance in cases of liquidity shortages for companies and the self-employed. Our tax experts have analyzed possible tax measures to accommodate increased liquidity and conclude that immediate loss carryback is an important measure to provide affected companies with short-term liquidity.


Immediate loss carryback

Loss carryback allows companies to apply their net operating loss to a prior year’s tax return and as such generates a tax refund, since it is as though the business overpaid its taxes for that year. Under the COVID-19 threat this measure could be made available to companies immediately, meaning they do not have to wait for the end of the year to report their losses. Instead they only report that they suffer from the COVID-19 threat, and subsequently receive tax refunds to increase their liquidity. As such, immediate loss carryback is a helpful emergency tax measure to financially relieve threatened companies.

In practice: short-term, simple and company-specific

Income/Corporate Tax

To bring this loss carryback into practice we recommend the following measures. First of all, arrangements to provide liquidity have to be carried out short-termed and without unnecessary bureaucratic requirements. We recommend that the overpaid tax should be refunded immediately upon application, and that an informal application by the taxpayer, meaning without assessing whether the applying taxpayer is affected by Corona-induced losses from sales shortfalls, should suffice. Furthermore, the liquidity supply by immediate loss carryback should not induce any interest payments on these upfront tax refunds.

Secondly, the liquidity supply should be company-specific. Therefore, we do not recommend a lump sum transfer independent of the company’s size. Depending on the targeted liquidity effect, a partial payment could be discussed. Thus, depending on the expected duration of the economic difficulties (3, 6, or 12 months in 2020) either 3/12, 6/12, or the full tax could be refunded.

Thirdly, to ensure short-term and unbureaucratic, as well as company-specific assistance we recommend using the profits of the previous year as a basis. Specifically, the total amount of profit from the previous year should be used as the basis for the loss carryback. An extension of this immediate one-period carryback to a carryback of two periods should be considered.

German Trade Tax

A refund to the taxpayer should also apply, at least partially, to the German trade tax. Trade tax, on average, burdens corporations to the same extent as corporate tax. It also burdens partnerships despite the flat-rate imputation to the income tax, at least partially. Yet, technically a loss carryback cannot be applied to this tax form. In order to achieve the same effect as for the income/corporate tax, we are thus advocating an immediate tax refund anticipating a future loss compensation.

Implementation: short-term, simple and limited period of time

As we already mentioned, it is important that the proposed tax refunds are quick and painless. They should happen without unnecessary application forms and within a few days. We recommend that companies hand in a simple, informal report about their missed business activities and/or rough estimate of the sales drop. In times of crisis, such a simple report should suffice. Finally, we recommend communicating a clear timeline: the possibility of an immediate, increased loss carryback through tax refunds should be offered for a limited period of time.

Direct aid for uncovered cases

There will be companies and self-employed persons who are not sufficiently covered by the proposed measure. For these groups we should seek further direct liquidity support. Examples are companies that have created jobs that are not (yet) profitable. Instead of using tax measures to assist these companies, we recommend offering these groups direct aid. The intensity of assistance could depend on the level of social security contributions.

In conclusion, we believe that an immediate loss carryback offers an effective and easily implementable aid for the liquidity problems that many entrepreneurs and companies are currently facing. We would like to emphasize that the measure does not represent a tax cut. It rather is an anticipation of future tax relief in order to provide emergency aid without red tape. We urge companies and government officials to review these recommendations for their emergency tax measures to support our economy and minimize the economic impact from the health crisis.


To cite this blog:

Schanz, D., Sureth-Sloane, C., Gassen, J., Jacob, M., Maiterth, R., Müller, J., Nicolay, K., Ortmann, R., & Voget, J. (2020, March 25). COVID-19: combat liquidity shortages with immediate loss carryback, TRR 266 Accounting for Transparency Blog.


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