Tax Foundation Forum: Making Sense of Profit Shifting has reached its midpoint. In this halftime report, we provide a synopsis of the first nine of the 18 interviews in the series. This two-part review summarizes the key...
- The Tax Policy Blog
- Dislike Attempts to Double Tax Facebook
Dislike Attempts to Double Tax Facebook
Citizens for Tax Justice (CTJ) has long depicted the use of stock options as a way for corporations, such as Facebook, to avoid tax:
Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.
Instead, Facebook says it will receive net tax refunds totaling $429 million.
Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.
But that’s not all of the stock-option tax breaks that Facebook generated from its initial public offering of stock (IPO). Facebook is also carrying forward another $2.17 billion in additional tax-option tax breaks for use in future years.
So in total Facebook’s current and future tax reductions from the stock options exercised in connection with its IPO will total $3.2 billion. That’s almost exactly what CTJ predicted last year, when Facebook first announced its IPO.
Here is another amazing admission: Mark Zuckerberg and other Facebook employees have to pay tax on these options. A lot of tax. Mark Zuckerberg alone will pay something like $2 billion in federal and California income taxes as a result of exercising $5 billion in options last year. That’s because options are a form of compensation, much like salary, so they are taxed as ordinary income. Like all compensation, options are deductible as a business expense. CTJ, as well as Senator Levin, would remove this deductibility, thus double taxing this form of compensation, i.e. first by the corporate tax and then by the individual income tax.
Double taxing is a serious no-no. Double taxing our most successful entrepreneurs and businesses is just dislikable.
Follow William McBride on Twitter @EconoWill
Get Email Updates from the Tax Foundation
We will never sell or share your information with third parties.
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.