Facebook Inc.’s IPO will create billions in new wealth for its founders, staff and investors. It will also save the company 16 billion dollars in federal taxes.
That’s the amount Facebook will be in a position to subtract from its tax liability for granting stock options to its owners and staff. The tax-break windfall, which should be the largest ever claimed by a firm for stock option awards, is generally known as the “stock option tax loophole.”
It’s an entirely legal tax sidestepping technique. Tax law claims that if a business issues options to staff to buy stock in the future at a pre-set price, the company gets to subtract the largest difference between what the workers paid for the shares (the strike price) and the shares ‘ market price. That difference is treated by the IRS as though it were a work expense, which is deductible from revenues.
Facebook filings reveal that that difference is expected to be about $16 billion dollars. The business intends on employing the rebates to help it avoid taxes for several years to come. It will also claim a $500 million refund for taxes paid in the last two years.
Senator Carl Levin has long sought to end the stock-option loophole and is utilizing the Facebook IPO to promote legislation that would stop it. Even as it tells potential financiers about its growing income flow, Levin declared today, “Facebook is planning simultaneously to tell Uncle Sam it has no taxable income, balancing its income with stock option tax deductions.”
“This profitable enterprise will stop paying any federal corporate income taxes, simply because it gave millions of stock options to its executives,” he revealed 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 huge tax refund.”
Levin has a point. But defenders of the loophole responded that the firm’s nonpayment of taxes will be offset by taxes paid by the recipients when they exercise their options. Levin has a rebuttal to that claim, too, saying that Facebook as an enterprise benefits from administrative services, ranging from patent protection to trade enforcement. And, the senator claims, the fact that executives pay taxes doesn’t mean corporations should not.
Adding insult to injury, Levin stated, is that co-founder Eduardo Saverin renounced his U.S. Citizenship to get around paying taxes on his Facebook IPO. 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 having done so.
JG Tax Group wants to know what you think. Facebook’s founders and investors made a $100 billion dollar corporation that now employs more than 3,500 individuals and has changed the way the world interacts. Does it merit a $16 billion corporate tax break? Or is it time to repeal the stock option loophole?
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