WASHINGTON — Citigroup and other banks starting to repay the billions of dollars they borrowed from the government are getting another boost as they exit the bailout program: billions more in tax breaks.
Tax law allows money-losing corporations like Citigroup and General Motors to use current net operating losses to offset future taxable income, reducing their tax bills for up to 20 years after the losses occur.
Under ordinary circumstances, those tax breaks would be severely limited if the companies underwent an ownership change, much like many of them did when the government acquired big blocks of their stock.
Losing the tax breaks would have substantially reduced the value of the companies, even as the government was trying to prop them up with bailout funds.
The Treasury Department didn't want that to happen, so it started issuing tax guidance about a year ago that said the rules didn't apply when the government, through its bailout programs, caused the ownership change.
Last week, Treasury issued additional guidance saying that the rules also won't apply when the government sells a company's stock. The new rules mean that Citigroup and other bailout companies will still be able to take advantage of tax breaks worth billions of dollars once they become profitable and start paying taxes again.
For tax purposes, it's like the government's ownership never happened, said Robert Willens, a corporate tax accountant in New York.
The size of the tax breaks will depend on how soon the companies become profitable, Willens said. "It's certainly in the billions," he said.
Citigroup announced this week that it was repaying $20 billion to the government's Troubled Assets Relief Program, or TARP. Citigroup had taken $45 billion in rescue funds — among the largest bailout packages received by any bank — but the government converted $25 billion of that amount into a 34 percent equity stake, which it is now selling.
The tax breaks will cost the government billions of dollars in tax revenue, but the government's stock in the companies is worth more because the value of the companies is higher.
"This guidance is the part of the government's orderly exit from TARP," Treasury spokeswoman Nayyera Haq said.
She defended the overall strategy of helping bailed-out companies preserve their tax breaks, pointing out that the original law was intended to prevent corporate raiders from taking over money-losing companies simply to cash in on their tax breaks.
White House spokesman Robert Gibbs said the policy merely allows Citigroup and other bailed-out companies to preserve the tax breaks they were entitled to before the government intervened.
"Citigroup's losing money. They can use that against their taxes," he said.