Citizens for Tax Justice (CTJ) has long depicted the use of stock options as a way for corporations, such as Facebook, to avoid taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. :
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 taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. .
Double taxing is a serious no-no. Double taxing our most successful entrepreneurs and businesses is just dislikable.
Follow William McBride on Twitter @EconoWillShare