05/21/2012 09:08 am ET

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.)

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