Facebook’s Initial Stock Offering Will Help It Dodge Corporate Income Taxes For Years

Back in 2008, Google seemed to have set the standard for tech corporation tax dodging, using complex accounting and subsidiaries in Ireland and Bermuda to drives its tax rate all the way down to 2.4 percent. But if all goes according to plan, Facebook will be able to use its initial public offering — via the stock options it gives its employees — to not only avoid paying corporate income tax for years, but to receive a $500 million refund from the federal government, as Citizens for Tax Justice explained:

Tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Facebook’s filing papers with the Securities and Exchange Commission confirm as much:

Option exercise activity would generate a corporate income tax deduction [that] exceeds our other U.S. taxable income [and] will result in a net operating loss (NOL) that can be carried back to the preceding two years to offset our taxable income for U.S. federal income tax purposes, as well as in some states, which would allow us to receive a refund of some of the corporate income taxes we paid in those years. Based on the assumptions above, we anticipate that this refund could be up to $500 million.

“Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation,” said Sen. Carl Levin (D-MI). “It isn’t right, and we can’t afford it.” The Treasury Department estimates that it loses about $2 billion per year due to companies using this stock option loophole to avoid taxes.