Tax Break

Facebook expects $14 billion tax break from options

May 4, 2012

When Facebook issued its original prospectus in February we wrote about how the expensing of options would sharply reduce the tech giant’s tax bill in the near future.

Now that it’s closer to IPO time, the company has put out fresh information on the impact its mega-offering will have on the company’s annual bill from Uncle Sam, and it’s even bigger than was thought.

The bottom line is the same: Facebook won’t owe tax this year, and its rate will stay low for years to come.

The reason is that if the stock goes public at the midpoint of the current range of $28 to $35 per share, the Facebook number crunchers, according to the May 3 filings, “estimate that this settlement and option exercise activity by U.S. employees would generate a corporate income tax deduction of approximately $14 billion.”

Without that $14 billion deduction, at the corporate tax rate of 35 percent, Facebook would have had to pay an additional $4.9 billion in taxes that it will now avoid, noted Rebecca Wilkins, senior counsel for Citizens for Tax Justice, which opposes this tax treatment of stock options.

Such a deduction is well over the estimated $3 billion that Senator Carl Levin railed against just weeks after the first filing.

It’s almost certain to well exceed the company’s 2012 taxable income.  (Facebook made $1 billion last year). What’s left  over will go to other taxes.

Up to $500 million will be applied to previously paid taxes. (Yes they’ll be asking for a $500 million rebate.) The rest will go to lowering future tax bills.

There are implications in the filing for founder Mark Zuckerberg’s taxes as well, as the blog Double Taxation explains :

Today’s S-1 clarifies that the CEO will be exercising only 60,000,000 of his 120,000,000 options. Assuming each share is indeed worth $35 upon exercise, Zuckerberg will recognize compensation income of “only” $2.1 billion in 2012.

To pay the resulting $1.0 billion tax bill, Zuckerberg plans to immediately sell 30,200,000 of the shares. Since the shares will have a basis equal to the sales price courtesy of the step-up afforded to Zuckerberg after he recognizes compensation income on the bargain element at exercise, he will recognize no further gain on the sale. He will, however, generate $1.1 billion in cash from the sale, $1.0 billion of which he can use to settle the tax liability resulting from the exercise, and the rest he can just piss away on hats.

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