It's a perfectly legal tax move that feels... somehow criminal.
Senator Carl Levin (D-Mich) feels the same way. For months, Senator Levin has been campaigning the Senate against the deplorably enormous tax break Facebook is set to receive with its IPO.
According to Senator Levin, Facebook will put a low stock value on the books (Facebook's filings state 6 cents). It will file losses later for their actual worth (just announced at $38/share).
Facebook says it will, as allowed by law, later claim deductions on the difference. Then, further claim a refund on this "loss" two years back for taxes it already paid. Facebook has said they will carry this so-called "loss" 20 years ahead.
Facebook gets a hefty tax refund and avoids taxes for years, potentially decades to come.
All told, Senator Levin says the loophole will put an estimated $3 billion tax break in Facebook's coffers.
Again I restate: this is legal and Facebook's actions are within the law. Those 1% are some pretty slick players.
This is all why for Senator Levin, Mark Zuckerberg is the poster child for U.S. tax reform - and Facebook is a textbook example of America's unfair and unjust corporate tax loopholes.
According to its filings, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share.
Mr. Zuckerberg’s shares, obviously, are going to be worth a great deal more than 6 cents, a total of about $7 million; they will apparently be worth more than 600 times as much, something in the neighborhood of $5 billion.
Here’s where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he received cost the company a mere 6 cents a share – that’s the expense shown on the company’s books.
But the company can also – perfectly legally – later file a tax return claiming that those same options cost the company something close to what the shares actually sell for later on – perhaps $40 a share.
And the company can take a tax deduction for that far large amount. So the books show a highly profitable company – profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees.
But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.
In addition, Facebook is allowed by law to carry back the so-called “loss” arising from this deduction for two years into the past, which means it can claim a tax refund for the income tax that it has paid over the past two years – a refund the company estimates at half a billion dollars.
So instead of paying taxes to the treasury, this profitable company will claim a hefty refund on taxes already paid.
But that’s not all.
The company says it will, as allowed by law, also carry forward the so-called losses arising from this tax deduction up to 20 years into the future, thereby reducing any tax it owes in the years ahead. Altogether, this loophole could give Facebook a tax break of up to $3 billion.
Now, the end result is that a profitable U.S. corporation – a success story – could end up paying no taxes at all for years, even decades.
Do you feel like this shouldn't be legal?
Senator Levin doesn't think it should be, and considers Facebook's IPO - its $3 billion tax break - to be the sharpest example as to why this corporate tax loophole needs to be closed, ASAP.
Also according to the expose, Facebook's activities in D.C. include a small PAC, yet over $650K was spent lobbying Congress - and an astonishing $4 million to political campaigns and candidates since 2006.