Sunlight Exposes Facebook’s $3 Billion Tax Break, Hours Before Company Goes Public

Posted on May 18 2012 - 4:30am by Editorial Staff

The Sunlight Foundation published an expose revealing, hours before the world’s largest social giant goes public, that Facebook’s IPO do exploits a tax loophole, means it will avoid paying taxes for years, almost an estimated $3 billion tax break. This means that company will need not to pay taxes for years. According to Senator Levin, Facebook will put a low stock value on the books (Facebook’s filings state 6 cents). It will file losses later for their actual worth (announced at $38/share).

In his speech from the Senate floor Senator Levin explains in detail:

According to its filings, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share.

Mr. Zuckerberg’s shares, obviously, are going to be worth a great deal more than 6 cents, a total of about $7 million; they will apparently be worth more than 600 times as much, something in the neighborhood of $5 billion.

Here’s where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he 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.

In addition, Facebook is allowed by law to carry back the so-called “loss” arising from this deduction for two years into the past, which means it can claim a tax refund for the income tax that it has paid over the past two years – a refund the company estimates at half a billion dollars.

So instead of paying taxes to the treasury, this profitable company will claim a hefty refund on taxes already paid.

But that’s not all.

The company says it will, as allowed by law, also carry forward the so-called losses arising from this tax deduction up to 20 years into the future, thereby reducing any tax it owes in the years ahead. Altogether, this loophole could give Facebook a tax break of up to $3 billion.

Now, 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.

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Editorial Staff

Editorial Staff at I2Mag is a team of subject experts led by Karan Chopra.