COVID-19 Pushes Strategic Tax Planning to Center Stage

Companies’ impressively resourceful responses to the pandemic – from expanding remote work to redoubling their efforts on business continuity planning – have grabbed lots of media attention in the past year or so. Less well-publicized, but crucial for many businesses, is the heightened attention to strategic tax planning and its role in protecting cash flows and laying the groundwork for recovery.

A good example is the increased interest in tax benefits to apply in preservation plans designed to protect net operating losses (NOLs) and other tax assets in the event of an “ownership change” as defined under the Limitation on Net Operating Loss Carryforwards, as well as certain built-in losses following ownership change in the Internal Revenue Code (IRC) Section 382 and the amended Section 172 of the CARES Act. To take just a couple of recent high-profile examples, Gulfport Energy Corporation’s board of directors unanimously adopted a tax benefits preservation plan to protect some $1.3 billion in federal NOLs available to offset future taxable income. And last December, United Airlines announced a similar preservation plan to protect approximately $8.2 billion in NOLs. 

The goal of this kind of planning structure is to reduce the likelihood that a change in a company’s investor base (think “hostile takeover”) would limit its future use of its own tax assets – which in turn would reduce their value. In the wider strategic view, these tax strategies help to defend the company against an unwanted buyer that might want to deploy the NOLs for its own purposes and might not see the company’s recovery and long-term health as top priorities.  

These tactical moves suggest that companies are recognizing the strategic prominence of tax in the COVID response. The pandemic has created new opportunities for tax leaders to extend their strategic role in cross-functional initiatives and technology projects, as Vertex Chief Tax Officer Michael Bernard points out in a recent post, COVID Magnifies the Need for Procurement and Tax Alignment. Similar opportunities will continue to arise as tax leaders grapple with legislative changes stemming from tax authorities’ need to compensate for lower revenues in the wake of the pandemic. (See my colleague Marc Duclos’ post, Assessing COVID-19’s Impact on the Tax Landscape). In fact, an enhanced strategic profile for tax may be an enduring feature of the emerging “new normal” in a post-COVID world.