Tax Break

Senator Levin unhappy with Facebook’s pending $3 billion tax break

February 29, 2012

Even before it’s become a public company, web giant Facebook’s has caught plenty of government attention, much of it around the company’s taxes and the impact its billions in stock options are likely to have on the tax coffers.

Today Senator Carl Levin, long active on tax issues, took to the Senate floor to point out the many things he dislikes about the company’s expected tax picture, hoping to tap into broader discussions about the need for greater fairness in the tax code.

On the heels of a California estimate that it could haul in $2.5 billion in income taxes over the next five years as Facebook workers cash in stock options, Levin is highlighting the corporate tax implications of all those stock options.

Under the tax code, individuals pay income tax on their stock options, but the corporation that granted them gets to deduct the value of those stock options, a treatment Levin considers a loophole that should be changed.

As we wrote earlier this month,  if all 187 million of Facebook’s vested non-qualified options were exercised in 2012, that could generate a corporate tax deduction so huge it would wipe away its 2012 tax bill entirely, and produce a tax refund of up to $500 million during the first six months of 2013, and sharply reduce the company’s current 41 percent corporate tax rate.

Levin, who has proposed legislation to change these rules, said today that Facebook will be able to claim a $3 billion tax deduction that “could allow the company to avoid paying federal income tax for up to 20 years.”

In his speech Levin explained that inherent injustice he sees in the current system:

Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options (Mark Zuckerberg) 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.

Because those tax breaks can be used for years to come, said Levin, “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.”

Stock options grants, he further noted, are the only kind of compensation where the tax code allows companies to claim a higher expense for tax purposes than is shown on their books.

How does this make any sense? Levin asked.

American taxpayers will have to make up for what Facebook’s tax deduction costs the Treasury. That $3 billion will either come out of the pockets of American families now, or it will add to the deficit which they will have to pay for later.

The most common argument against Levin’s position on stock option taxes, is that the taxes paid by individuals, among them Mr. Zuckerberg, will compensate for corporate taxes forgone. In his speech Levin argued the counter case. First, he contended that whatever taxes the Treasury gets from Zuckerberg, it will “return and then some” to the company. As a major owner of the company moving forward Zuckerberg will benefit from its ultra-low tax expenses.

Whether Facebook’s dramatically large IPO — and the tax breaks trailing in its wake — bring the momentum Levin is hoping for remains to be seen.

The bill to end the tax treatment of stock options he introduced with Senate Budget Committee Chairman Kent Conrad earlier this month is substantially the same as bills he introduced in the past several Congresses, but that failed to reach passage.

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