Last month, we noted that Facebook’s initial public offering could help it avoid corporate income taxes for years, via a misguided tax provision that allows the company to write off the increased value of stock options that it gives to employees when its employees exercise those options. According to the company’s filings, Facebook anticipates receiving a $500 million tax refund because of this provision.
However, two Democratic senators are trying to change the law so that companies can no longer use this particular deduction:
Sens. Carl Levin (D-Mich.) and Kent Conrad (D-N.D.) introduced a bill Wednesday that would close what they called a significant loophole in the country’s tax code, which allows companies to take a hefty deduction when employees cash in their stock options.
Facebook anticipates its deduction will be so large that it will wipe out the company’s tax obligations for all of 2011, according to the firm’s regulatory filing for its initial public offering. The company also expects to get as much as $500 million in refunds applied to the taxes it paid over the last two years.
As Levin has said, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”
Indeed, the problem with this provision is that it gives companies a tax write off for doing, well, nothing. As Robert McIntyre explained at Citizens for Tax Justice, “in the case of stock options, there is a clear economic benefit to the employees (if the stock goes up in value), but a zero cost to the employer.”
Here’s an example of why this is problematic. Facebook CEO Mark Zuckerberg bought his stock options for six cents, but “when he exercises those options, they are expected to be worth $40.” Facebook will get to write off the difference between six cents and $40, thus lowering its tax bill, even though those “expenses” didn’t actually occur.
According to the Joint Committee on Taxation, Levin and Conrad’s change would raise about $20 billion over ten years.