Social media sites Facebook and LinkedIn are enjoying massive tax breaks on stock options, according to recent reports.
Facebook’s first “10-K” annual financial report since going public last year disclosed in its footnotes that despite $1.1 billion in U.S. profits in 2012, the Menlo Park, Calif.-based company did not pay any federal and state income taxes. Instead, Facebook said it will receive net tax refunds totaling $429 million, according to a report by the advocacy group Citizens for Tax Justice.
Facebook’s income tax refunds stem from the company’s use of the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1.033 billion in 2012, including refunds of earlier years’ taxes of $451 million.
That’s not all of the stock-option tax breaks that Facebook generated from its initial public offering, which was disastrous for many investors last year. Facebook is also carrying forward another $2.17 billion in additional tax-option tax breaks for use in future years, CTJ pointed out.
Facebook’s current and future tax reductions from the stock options exercised in connection with its IPO will total $3.2 billion.
CTJ also found that Facebook competitor LinkedIn benefited from tax breaks. An analyst with CTJ told the New York Post that LinkedIn paid no federal income taxes over the past three years, despite making $160 million in profits, by deducting expenses for employee stock option rewards.
The group has been regularly reporting on how large corporations pay little in federal income taxes. A November 2011 CTJ report assessing the taxes paid by the Fortune 500 corporations that were consistently profitable from 2008 through 2010 identified the stock option tax break as a major factor explaining the low effective tax rates paid by many of the biggest Fortune 500 companies.
Senator Carl Levin, D-Mich., introduced legislation in July 2011 to require companies to treat stock options the same for both book and tax purposes and has signaled his intention to introduce similar legislation early this year. According to calculations made by Levin’s staff using data from the Internal Revenue Service, U.S. companies have consistently deducted far more stock options for tax purposes in the past five years than they recorded as a book expense. This “excess” deduction is estimated by Levin’s staff to range between $12 billion and $61 billion a year.
3 Comments
Mike Cohn, I surely hope you are not a CPA. Clearly, CTJ doesn't employ any.
Every dollar of deduction taken by these companies, due to the stock options, is a dollar of income claimed by the receiver of the options. In addition to Rick's important points about the higher tax rates and employment taxes, it's also important to consider the following. While the company has to carry forward some of it's losses, the individual will pick up the income in 2012. The individuals are paying tax on 3.2 billion in 2012. The company is taking losses of 3.2 billion over time. Time value of money indicates this is a GREAT deal for the US Treasury.
Of course, we have to recognize that corporations don't pay taxes. Individuals do! A corporation, if it so desired, could pay out every dollar of income needed to get taxable income down to zero, and never pay a dime in federal income tax. Of course, there are plenty of non-tax reasons why corportations want to show a profit.
And that brings us to the real issue, which is GAAP, and the problems of income reporting under GAAP. You don't see a lot of companies getting busted for income tax problems. You do, however, see all manner of corporations getting busted for having inaccurate financial statements.
I understand why people think corporations are evil: laying off people seemingly at random, having a CEO drive a company into the ground and getting a 8-figure payout to leave, boards of directors that are nothing more than corporate neoptism, etc. But that has nothing to do with the tax code.
Posted by: SouthernCPA | February 22, 2013 1:49 PM
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Rick, how is it being intellectually dishonest to question how a multibillion-dollar company like Facebook can pay no federal income taxes and receive a tax refund for hundreds of millions of dollars after a lucrative IPO? As for the executives who received the stock options and how much they will pay back to the U.S Treasury, look at Facebook co-founder Eduardo Saverin, who renounced his U.S. citizenship around the same time as the IPO and moved to low-tax Singapore.
Posted by: MikeCohn | February 22, 2013 8:12 AM
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Please stop calling compensatory options that are not ISOs "tax breaks." That is ridiculous. It is misleading and it is wrong. Facebook did not allow section 83(b) election so BY LAW the individual has taxable compensation equal to the FMV of the stock at that time (which is why book and tax compensation was different)the property was no longer subject to a substantial risk of forfeiture. The company gets a tax deduction and the individual picks up 100% of the FMV in income. THERE IS NO BREAK that disadvantages the US Treasury since for every deduction, the individual picks an offsetting amount of income. Since it is a lot easier for companies to reduce their effective tax rate than individuals, the total tax take for the US Treasury is actually MORE than if the option had not been granted. Moreover, unlike corporations, individuals also must pay employment taxes on the FMV. So all of this whining and complaining about "tax breaks" for options is unfair and is little more than a cheap shot. This sort intellectual dishonestly is unproductive.
Posted by: Ricktaylorcpa | February 22, 2013 7:27 AM
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