Despite $1.1 billion in U.S. profits in 2012, Facebook is not paying even a dime in federal and state income taxes. Instead, Facebook said on Monday it will receive net tax refunds totaling $429 million from previous years.
No, Facebook is not breaking the law by avoiding paying taxes. the company’s use of a single tax break, the tax deductibility of executive stock options, allows it to take tax allowances of a couple of billion to take forward into future years.
Corporations do not get taxed on profits purely in any one tax year. They get taxed on cumulative profits over time. This is because a company starts up and makes losses for the first few years as it refines its technology, finds customers and so on. Then it breaks into profit. So it is allowed to carry forward the losses it had in early years building the business.
If a new business wasn’t allowed to carry forward tax losses then it wouldn’t be able to compete against an established company. That wouldn’t be sensible: as well as being most un-American in favoring the big guy over the little.
Then there’s the tax deductibility of share options themselves. They’re a cost of doing business. That’s just how Facebook pays its people and paying the staff is indeed a cost of doing business.
Companies like Facebook are allowed to treat the cost of non-cash compensation, such as stock options, as an expense that reduces profits, essentially the way they treat cash compensation such as salaries.
Some members of Congress have recently taken aim at this remaining tax break. In July of 2011, Senator Carl Levin (D-MI) introduced the “Ending Excess Executive Corporate Deductions for Stock Options Act,” to require companies to treat stock options the same for both book and tax purposes.
Although corporations may not actually pay taxes, their shareholders and employees do. In the case of Facebook, all those who exercised those stock options most certainly did pay tax. At one point Mark Zuckerberg was reported as owing $500 million in taxes for 2012 as a result of exercising his options. He sold stock in the IPO to that value specifically (so the IPO offer documents said) in order to pay those taxes due.