Facebook’s first Form 10-K filed with the SEC since its face-plant public offering shows $1.1 billion in profits and a complete pass on federal and state income taxes. In fact, Facebook says it is getting back tax refunds of $429 million. Facebook Gets a Multibillion-Dollar Tax Break. Is this legal, you might ask?
Yes, under current law it is, as Facebook is want to point out. Facebook can legitimately deduct stock options given to execs. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million. Here’s Why Facebook Is Getting A Refund On Its Income-Tax Bills. Gone are the questions for shareholders about which gains could be taxed as capital gain rather than ordinary income. See Top Tax Tips From Zuckerberg’s Facebook Bonanza.
Mr. Zuckerberg can’t score points by advising to buy low and sell high or to make an 83(b) election. But Mr. Zuckerberg quietly caused Facebook to pay off $1.9 billion in federal taxes related to restricted stock units. Why Facebook Is Paying the Tax Tab on Employee Compensation. Facebook announced it planned to use cash to pay off the tax debt. The taxes arise out of restricted stock units issued to Facebook employees.
Facebook “net settled” the units by withholding taxes. Since the units themselves don’t involve cash, Facebook had to come up with almost $2 billion. But one key is the tax deduction Facebook receives when employees must include the value of their stock compensation in their income. For Facebook, it is treated as paid in cash so yields whopping tax deductions. Those deductions became controversial.
“Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation,” said Senator Carl Levin, the Michigan Democrat who proposed changing it. And that is exactly what happened. Facebook’s Multi-Billion Dollar Tax Break: Executive-Pay Tax Break Slashes Income Taxes on Facebook– and Other Fortune 500 Companies.
Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
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