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Twitter won't pay tax on the first $107 million of income it reports

Mark Sullivan | Nov. 11, 2013
Tech companies are leveraging the U.S. federal deduction related to stock option compensation that relieves them of paying millions in income taxes

The federal deficit—the amount by which the government's total budget outlays exceeds its total receipts for a fiscal year—is estimated at $680 billion for fiscal year 2013. The federal debt—the sum total of our deficits over the years—is sitting at about $17 trillion.

Meanwhile, some of Silicon Valley's richest and best-known companies are avoiding income taxes by taking deductions related to stock options used to compensate executives. Twitter, which went public on Thursday, is one of them.

Last April we detailed how tech companies park cash overseas to avoid taxes, and now a new report from the Center for Tax Justice shows that a dozen emerging tech companies have stockpiled enough unused stock option tax credits to avoid paying income taxes on the next $11.4 billion of U.S income they (collectively) earn.

This means that Uncle Sam will miss out on a combined $4 billion in tax revenue from these 12 companies, which also include Facebook, LinkedIn, and Priceline.

A IPO gift from Uncle Sam
Twitter's IPO will earn the company about $1.8 billion, by most accounts, putting the total estimated value of the company at about $18.3 billion. Twitter, says the CTJ, is now holding $107 million of unused stock option deductions, which means that it won't have to pay taxes on the next $107 million of earned profits.

A little present from the IRS to ease Twitter's transition into "public" life? Maybe. Twitter will now have to start reporting its profits every month, but at least the company won't have to cough up income taxes on the first $107 million in profits it reports.

Twitter has some experience with tax breaks. It took a substantial payroll tax break from the city of San Francisco to keep its operations based in the downtown area.

Twitter is one of a wave of new tech companies awash in VC cash flocking to set up shop in San Francisco. Their arrival has sent housing prices and general cost-of-living spinning out of control in the City by the Bay. So while the city's apartment owners, health clubs, Whole Foods Markets, and dog walking services are benefitting from the arrival of the new wealth, Uncle Sam may miss out on his cut.

How the deduction works
Young tech companies often compensate employees by selling them stock options at bargain rates. As the company reaches maturity, employees will "execute," or sell, the options at a rate far higher than they paid for them. The federal government allows corporations to take a tax deduction for the difference between the value of the stock when granted to the employee, and the price of the stock when the employee finally sells it.


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