GM Earns Profit, Dodges Big Tax Bill, Report SaysBy Michelle Krebs February 23, 2011
The U.S. Treasury is giving up $14 billion in tax revenue, because of a "sweetheart deal" it's giving U.S. automaker General Motors that's about to start paying off, CNNMoney.com reports. On Thursday, GM will report its first year in the black since 2004. However, GM will not be hit with a big tax bill on those earnings because billions in previous losses will shelter it from taxes for years to come, CNNMoney.com reports. That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years and its global taxes by close to $19 billion, according to a company filing quoted by the Web site.
CNNMoney.com explains that companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the income the company receives from shedding its debt. GM shed $30 billion in debt during its Chapter 11 bankruptcy in 2009, and GM warned it expected to lose those tax breaks. However, notes CNNMoney.com, somehow, that never happened. GM kept most of its tax breaks, essentially receiving a $14 billion "gift" from the government.
How and why that happened is unclear. But academic and finance experts told CNNMoney.com that GM got preferential treatment likely because of the unprecedented government-aided bankruptcy process it went through. GM and Treasury Department officials denied to CNNMoney.com that GM got special treatment. The experts speculated that the government may have allowed GM to claim the loss to reduce the perceived cost of the bailout or to make GMs stock more attractive and easier to sell for last Novembers initial public offering.
Before GMs IPO, U.S. taxpayers held 61 percent of GMs stock; they received $13.5 billion or about three quarters of the proceeds from GMs record first-day back on the stock market. So while taxpayers received some benefit from the tax break, one expert told CNNMoney.com, that offset only a small fraction of the tax revenue the U.S. government gives up.