BP planning to take a $10 billion tax credit

Tax

BP has decided to roll the dice and try to take a $10 billion tax credit. Image: Flickr/alancleaver

Facing a $17 billion second quarter loss and $32 billion in spill cleanup costs, BP has decided to take a $10 billion tax credit. This credit is intended as a cash loan advance for companies in trouble. The legality of the BP tax credit is under debate. In the end, the U.S. Government may see more than half of the oil spill cleanup fund coming out of its own coffers.

Losses that spurred the BP tax credit

The way current IRS law is written, a company that is in severe financial trouble can take an extensive tax credit. In just the second quarter of this year, BP has reported losses of over $17 billion. Most of this loss is from the falling prices of BP stock. Though BP has not needed to borrow money fast to keep their operations going, they are facing heavy losses.

Effect of the BP tax credit

If BP does take the $10 billion tax credit, the U.S. Government could well be left holding half the oil spill cleanup bill. BP agreed to put $20 billion in an escrow account to pay for oil spill cleanup costs. If the U.S. Government gets $10 billion less in taxes, though, then the net effect is halving BP’s cost of the cleanup.

Arguments against BP’s tax credit

Press Secretary Robert Gibbs, in a press briefing, commented on the BP tax credit by saying “I don’t think anybody would prefer that [BP] do that.” The only even slightly comparable situation is where Goldman Sachs agreed to not write off the $535 million penalty paid to the SEC. It is an especially difficult situation because no other company has ever been in a situation like this — promising loans until payday to the U.S. Government, and then writing off those same loans.

Arguments for the BP tax credit

As reprehensible as some people are saying the BP tax credit is, there is a possibly legitimate reason for them. BP has promised to pay all cleanup costs of the spill — which will prove to be expensive. Unless BP can stay solvent, then getting the quick money loan needed for the cleanup could be practically impossible. If BP were to the point that the $10 billion tax credit made the difference between staying in business and continuing to make enough money to pay for cleanup, it may be defensible. If they are in that situation or not, though, is going to be up to the IRS investigation.

Sources:

Daily Finance http://www.dailyfinance.com/story/taxes/bp-claiming-9-9b-tax-credit-on-gulf-clean-up-costs/19571518/

MarketWatch http://www.miamiherald.com/2010/07/28/1749344/bp-eyes-10b-tax-credit-over-gulf.html#ixzz0uyReljAI

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