Facebook IPO Could Save Company $16 Billion In Taxes

Bloomberg View:

Facebook Inc.'s IPO will create billions in new wealth for its founders, employees and investors. It will also save the company billions -- about $16 billion, to be precise -- in taxes.

That's the amount Facebook will be able to deduct from its tax bill for granting stock options to its owners and employees. The tax-break windfall, which will be the largest ever claimed by a company for stock option awards, is known by some critics as the "stock option tax loophole."

Like it or not, it's a perfectly legal tax avoidance technique. Tax law says that if a company issues options to employees to buy stock in the future at a pre-set price, the company gets to deduct the difference between what the employees paid for the shares (the strike price) and the shares' market price. That difference is treated by the IRS as if it were a labor expense, which is deductible from earnings.

Facebook filings reveal that that difference is expected to be about $16 billion. The company plans to use the deductions to help it avoid taxes for years to come. It will also claim a $500 million refund for taxes paid in the last two years.

Senator Carl Levin (D-Mich.) has long sought to end the stock-option loophole and is using the Facebook IPO to promote legislation that would close it. Even as it tells prospective investors about its growing revenue steam, Levin said today, "Facebook is planning at the same time to tell Uncle Sam it has no taxable income, offsetting its revenues with stock option tax deductions."

"This profitable corporation will stop paying any federal corporate income taxes, simply because it gave hundreds of millions of stock options to its executives," he said from the Senate floor. "It will go from a corporate citizen that paid its taxes, to one that not only pays no taxes to Uncle Sam on its profits, but gets a tax refund."

Levin has a point. But defenders of the loophole respond that the company’s nonpayment of taxes will be offset by taxes paid by the recipients when they exercise their options. Levin has a riposte to that claim, too: Facebook as a corporation benefits from government services, ranging from patent protection to trade enforcement. And, the senator says, the fact that executives pay taxes doesn’t mean corporations shouldn’t.

Adding insult to injury, Levin says, is that co-founder Eduardo Saverin renounced his U.S. citizenship to avoid paying taxes on his Facebook IPO windfall. Saverin has denied that taxes are the reason he gave up his citizenship, but nonetheless he could save about $67 million in federal taxes by doing so.

Tell us what you think: Facebook's founders and investors created a $100 billion corporation that now employs more than 3,500 people and has changed the way the world interacts. Does it deserve a $16 billion corporate tax break? Or is it time to shut down the stock option loophole?

(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more from Bloomberg View: The Facebook Founder Who Unfriended America and Banking Burnouts Blow Away Myths of Wall Street Glamour.

Comments

[Repo 105]

11:42 PM on 05/21/2012

I thin if all the company's want to avoid tax responsibilities, the US government just dumps responsibility in their laps. No more patent protection, no more trade deals, no more defense of their headquarters with US law. See how they feel about taxes then. You want free market? Be careful what you wish for.

[edward60]

07:59 PM on 05/21/2012

I wonder why OWS protests, 16billion in tax savings is a lot

[MidtownMemphis]

06:15 PM on 05/21/2012

In essence, the company is getting a tax deduction for compensation to its employees. I really see no problem.

These people performed services. When any employee performs services, a company gets to deduct the employees' salaries before income taxes on the company are calculated. The employee pays taxes on the salary he receives.

Here's another way to look at it. An employee gets $1,000,000 in compensation and that employee turns around and buys $1,000,000 in company stock with that compensation. The company gets a tax deduction and the employee pays tax on the $1,000,000 in compensation. This is exactly what happened here. It's a net transaction.

These payouts are for past services that increased the value of the company. It's the American way! Why is it someone is upset that the world now has many new millionaires?

[MrBrownstone]

04:55 PM on 05/21/2012

Yeah, and do we still think that the tax code does not need to be redone... are the OWS people going to be protesting outside their headquarters too?

[Steve Rockett]

04:14 PM on 05/21/2012

Tax reform and increase taxes for the rich.

[questiontheblogs]

05:45 PM on 05/21/2012

Just so we all know ... how much income makes you "rich"? Or are you talking about net worth?

[Repo 105]

12:04 AM on 05/22/2012

250k

[Spanky231]

04:07 PM on 05/21/2012

And the OWS will be using FB en masse over the summer. Oh, the irony is too funny.

[BillyRI]

02:36 PM on 05/21/2012

We don't pay taxes. Only the little people pay taxes. (Helmsley)

[demilieu]

02:17 PM on 05/21/2012

that's a lot of school lunches and food stamps.

[Captain Hindsight]

01:33 PM on 05/21/2012

Is the wall street house of cards beginning to fall?
I sure hope we can regulate it back to a healthy economy.

[johnlvogt]

01:17 PM on 05/21/2012

The lead sentence in this story should read: Facebook Inc.'s IPO will shift billions of dollars to its founders, employees and investors from the unlucky gamblers at the NASDAQ casino.

[Julian Hudson]

12:36 PM on 05/21/2012

The stock option loophole should be left open since it isn't really a loophole at all. The burden of paying the tax is merely being shifted from the corporation who issued the shares to the people who received those shares. Really it is a means to keep the federal government from being able to tax the same dollar twice.

[mjslater]

04:13 PM on 05/21/2012

Not true at all. When you exercise stock options you pay a different tax rate then the corporate tax rate (which is higher). Also how do you say its "taxing the same dollar" at all? The justification for the tax break is that the company takes a major capital loss by awarding shares to employees at a lower cost then market, which means the company has to make up the difference.

If you can read between the lines, effectively Facebook avoids paying corporate taxes by instead awarding a massive stock option gain to investors and employees.

Facebook has made a huge profit as a US company, they should pay taxes. They shouldn't be able to eliminate their tax burden just because they decide to give a huge cash reward to investors and employees.

[questiontheblogs]

05:48 PM on 05/21/2012

Well then, should the company you work for be able to deduct your wages and benefits from their profit?

[Julian Hudson]

11:06 PM on 05/21/2012

So I take it that you must then be in favor of the current policy on the taxation of corporate dividends which are paid out to investors after the corporate tax has already been paid on that distributed cash and then gets taxed again in the hands of the shareholders. I realize that it is taxed at a reduced rate but it shouldn't be taxed at all.

On an IPO all shares are issued at below market because no objective public market actually exist until the shares start trading. I see that today the shares did trade below the issue price. You also need to remember that there is a lock up period during which certain insiders cannot trade their shares and are thus exposed to market risk that they did not have before the shares went public.

[Repo 105]

12:03 AM on 05/22/2012

I thought Conservatives wanted to get rid of complexity in the tax code? You're saying you want to keep it complex.

[mdonaldwil]

11:40 AM on 05/21/2012

I hope Zuckie got a Prenup! Otherwise it will soon be called MrsFacebook! HA!

[mdonaldwil]

11:38 AM on 05/21/2012

So Facebook is now part of the 1% who don't pay taxes?

[stevenurke]

01:18 PM on 05/21/2012

Seriously? Do you want to remove the deduction for wages and salaries paid then too as that is what you are implying with your stupid comment.

[Brad Bartkus]

11:35 AM on 05/21/2012

Thanks to the "Oh Lord won't you buy me a Mercedes Benz. My friends all drive Porsches, I must make amends" generation.
Sell outs.

[Brad Bartkus]

11:30 AM on 05/21/2012

If by some miracle I got a raise I would have to pay more taxes. Why should Facebook, or any other publicly-traded company that gives stock options, be any different?

[stevenurke]

01:19 PM on 05/21/2012

Because if you get a raise the company you work for moves taxable income from them to you. Same for stock options.