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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 CTJ argues that the beneficiaries of the deduction haven't really done anything to deserve it. While it costs a company something to pay employees real money, there isn't much cost in paying employees on paper.

Says the CTJ's report, "Unlike the wages earned by most employees, the stock options granted —so the case for allowing companies to deduct stock option 'expense' as a cost of doing business is weak."

Some in Washington agree. Senator John McCain (R-AZ) and Senator Carl Levin (D-MI) said this in a statement Wednesday:

"Nowhere else in the tax code can compensation costs produce a tax deduction several times larger than that same expense shown on its corporate books.

"For example, when Twitter goes public later this week, the company may avail itself of this existing tax loophole. Under this loophole, the company will be able to take an estimated $154 million tax deduction for a stock option compensation expense which its own books show cost Twitter only $7 million.

"Given the deficit and damaging sequester cuts facing this country, this corporate stock option tax deduction is the kind of tax loophole that ought to be closed."

Facebook is the options deductions champ
Facebook was among the first to realize huge benefits by exploiting the options deductions.

The company created more than 1000 new millionaires (some of them many times over) when it held its IPO in 2012. That wealth was created when employees exercised stock options they took as compensation from Facebook earlier in the company's life.

So while Facebook reported profits of $1.1 billion during 2012, the $1 billion in option compensation deductions the company had stored up, along with some other deductions, allowed it to pay effectively no income tax at all for the year, and even receive $429 million in refunds.

And, as the CTJ report points out, Facebook still has $2.17 billion in unused tax breaks for offsetting future income. At the 35 percent federal tax rate, this means the company's next $6.2 billion in U.S. earnings could be tax free.

Amazon won big, too
The CTJ says Amazon has also benefitted hugely from the deduction in past years. Amazon was able to reduce its federal and state income taxes by $750 million between 2010 and 2012.

"The company's combined federal and state effective tax rate over this period was just 9.4 percent; absent the stock option tax break, the combined tax rate would have been 40.4 percent," the report says.

The fun continues
CTJ says LinkedIn can use the stock option tax break to eliminate income tax on the next $571 million it earns. This could zero out LinkedIn's taxes for the next 10 years.


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