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 lets money-losing corporations such as Citigroup Inc. and General Motors Co. 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, the tax breaks would be severely limited if the companies underwent an ownership change, as 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 did not want that to happen, so it started issuing tax guidance about a year ago that said the rules did not apply when the government, through its bailout programs, caused the ownership change.
Last week, Treasury issued additional guidance saying that the rules also will not apply when the government sells its 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 is as though 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 Asset 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 revenue, but the government's stock in the companies is worth more because the value of the companies is higher.