Hundreds of Fortune 500 companies are reaping billions at the expense of Uncle Sam because of a legal tax break that critics claim defies "common sense."
Over the past three years 280 Fortune 500 companies have taken home a combined total of $27.3 billion, instead of forking it over to the taxman, thanks to an "excess stock options" tax break, according to a report released Wednesday by the Citizens for Tax Justice, a left-leaning research organization.
The tax break allows companies to write off as expenses the value of the stock options they award their executives as part of their compensation. It's also particularly beneficial to large companies, with just 25 companies netting half of the benefits over the past three years, the report found.
Because stock options are often part of executive compensation, companies can count the stock value as an expense against their profits, just like they would count cash pay. Though the practice is rather common among tech companies, which often pay a large portion of their executive compensation in stock options, older corporations like McDonald's, Starbucks and Goldman Sachs can still use the mechanism, according to Matthew Gardner the executive director of the Institute on Taxation and Economic Policy.
What all of these companies have in common are generally good stock performance and the fact that a large share of their executive compensation comes in the form of stock options, Gardner said.
"It's fairly obvious to begin with that this tax break is doing nothing for small businesses and even the smaller Fortune 500 corporations are left out in the cold on this one," Gardner said. "It's hard to find a tax break ostensibly available to all corporations that is so narrowly benefitting a select few."
The report comes as debate continues to rage in Washington over the best way to close the deficit. Corporate tax breaks represent $180 billion per year in lost revenue for the U.S. government, according to a recent report from the Government Accountability Office. President Barack Obama's budget proposal includes provisions that would end some of the loopholes, but would lower the top corporate tax rate from 35 percent to 28 percent. Starbucks recently sent a letter to Congress lobbying to protect and grow some of the breaks that it and other companies receive on their foreign profits, the Financial Times reports.
The executive stock options tax break gained notoriety last year when Facebook became a public company, because the social networking giant was able to get rid of its entire tax liability by using this one loophole. As a result, the company paid a negative 40.4 tax rate in 2012, according to an earlier CTJ report.
In response to that report, a Facebook spokeswoman wrote The Huffington Post in an email: "Billions of dollars went to the US Treasury and the California state treasury, as well it should have. The way these taxes are collected changes over time, and that is likely to be the case with Facebook. It's a mistake to look at only the corporate tax revenue while ignoring the billions of taxes paid from initial shareholders."
Apple, Starbucks, JPMorgan Chase and Facebook didn't immediately respond to requests for comment. Goldman Sachs declined to comment on the report.
McDonald's spokesperson Rebecca Hary told HuffPost by email, "McDonald's complies with tax laws and regulations in every area of world where we do business. As a public company, our financial results have been reported and publicly disclosed in accordance with accounting regulations."
"It's just a question of whether it makes any common sense," Gardner said. "The bottom line is that these companies are taking the deduction for money they're not really spending."
That's because issuing stock options to an executive doesn't cost the company in the same way cash compensation does, Gardner said. "The only meaningful costs associated with this are that the more stock you issue, the more it dilutes the value of the stock that's already held by shareholders."
Despite the fact that the government is losing out while big companies reap the benefits, lawmakers have shown little interest in getting rid of the loophole. Sen. Carl Levin (D-Mich.) introduced legislation last year that would cap the amount in executive stock options that companies could deduct from their tax bill, but it wouldn’t eliminate the tax break entirely.
The slow progress is likely because lawmakers are only really becoming aware of the issue now as more companies award large portions of executive compensation in stock options, Gardner said.
Goldman Sachs CEO Lloyd Blankfein received $10.7 million of his $16 million pay in 2012 in stock options, and a large part of McDonald's CEO Don Thompson's pay boost came in the form of stock option awards. Meanwhile, when Apple CEO Tim Cook first took the reigns at the tech giant, he was awarded 1 million shares of Apple stock, which, at the last calculation, were worth $510 million.
"Paying executives lavishly through stock options isn't something people were doing decades ago, it's a relatively recent development," Gardner said. "It's only now that we're really becoming aware how incredibly costly this tax break can be."