BP used a shifty accounting trick to cut their tax bill by $10 billion, a legal but questionable move for the oil barrens. As outraged citizens speak up, congress may get involved.The release of BP's earning statement revealed a $10 billion reduction in tax liability for their oil-spill clean-up expenses. People want to know- how and why is this legal? Here's the rub:
- Questionable or not, the huge reduction in tax liability for BP is a standard business expense deduction
-Businesses can claim refunds for previously paid taxes when a net operating loss (NOL) to offset future tax liabilities (In other words, they can claim the damages as a tax-exempt loss)
- These business expense deductions and NOLs supposedly enhance economic efficient by reducing business-cycle-induced fluctuations
The lofty $10 billion sum appears on the earning statement as a "tax credit", but it's not a tax credit in the traditional sense. The $10 billion amount reflects a reduction in tax liability on the $32 billion BP is estimated to pay in cleanup costs over several years.
If it's any consolation, BP can't claim the penalties they'll pay as tax deductions. But this tax move raises important questions. Do we need to change the tax code? Find a better way to determine what qualifies as a true business loss? Speak up, what do you think? Because I'm with all of you when I say I don't want to foot the bill for BP's offenses.