Amazon federal taxes: how the corporation's corporate tax bill was $ 0

The founder of Amazon is the richest person in America, but the company paid no corporate income tax last year. How can this be?

For starters, Jeff Bezos is rich because of the value of Amazon's stock, but for years, Wall Street has liked the company even though it was a big deal. retail giant and technology oddly unprofitable. But more recently, Amazon has recently emerged as an ever profitable business, earning a profit of nearly $ 11 billion last year. Yet, during this surge in profitability – the company's profits doubled between 2017 and 2018 – Amazon's tax bill actually decreased. According to an badysis by the Institute of Taxation and Economic Policy, the company paid $ 0 in corporate income tax last year, an astonishing figure that generated dozens of reports last week.

The tax treatment of stock-based compensation for executives has a somewhat odd feature: the more successful your company is, the lower your tax bill.

In other words, Amazon did not avoid paying a corporate tax in 2018 despite the huge rise in profits, but for the most part because of that. If this seems to be a political failure, the real problem probably lies not in Amazon's modest tax bill, but in the extent to which a political initiative taken in the early 1990s to limit CEO salaries is totally turned against them.

Amazon's three tips for reducing taxes

An interesting thing to note here is that Amazon is not reduce its tax bill through conventional schemes of technological companies such as concealment of profits in foreign subsidiaries or the declaration of foreign company. Amazon's sales are mainly in the United States and its No. 2 market is Germany, which is also a relatively high tax jurisdiction.

Amazon is not fooling anyone here; he has no legitimate tax.

• In part, this is because Amazon is able to take advantage of the research and development tax credit, a low-profile policy that encourages profitable businesses to spend their income on research and development. The Congress is systematically extending this approach on a bipartisan basis, thinking that innovation research is a good thing, and Amazon is obviously a company that does a lot of research and development.
• The second reason is that Trump's tax bill included a temporary provision allowing businesses to benefit from a 100% tax deduction for investment in equipment. It's a controversial idea, but it enjoys some support from parties – the Obama White House economist, Jason Furman, likes it, for example. More generally, when Democrats complain that companies devote too much of their profits to share buybacks rather than investments, they actually want more of them to act as Amazon – which does not allow any repurchases of shares and invests a lot – and that. The tax provision of the Trump project encourages businesses to do so.
• The last and most important to understand the change of 2018 is the fact that companies can deduct the cost of stock-based compensation from their taxable income, even if it does not actually cost companies to hand over shares of stock. their own actions to their employees. In addition, this cost is estimated as follows: the higher the price of your stock, the greater the deduction for the distribution of shares. It is precisely because Amazon's profits have increased that the price of the company's shares has increased significantly and the value of these deductions has also increased.

This may sound a bit unconventional – in general, the idea is that more successful companies should pay higher taxes, but not less – but there is a very good accounting reason for this. At the same time, the tendency of companies to offer management-based compensation solutions is essentially a huge loophole in a multi-decade tax provision that is meant to deter excessive remuneration to executives.

Stock-based compensation, explained

Since 1993, Bill Clinton and congressional Democrats have had the idea of ​​tackling the growing wage inequality in America of the Reagan era – Article 162 (m) of the United States Tax Code.

Normally, while companies pay sales taxes to state and local governments, the federal government taxes them on their profits.. Revenues paid to employees in the form of wages and benefits are not earnings and therefore are not taxed. However, section 162 (m) created an exception to this rule: any salary of more than $ 1 million paid to the most senior officers would not be deductible for tax purposes. The idea was to deter lavish executive pay programs. Aside from an exception to this exception, compensation in the form of stock options or stock options would still be deductible. In practice, the 1993 change therefore encouraged companies to use a large portion of stock-based compensation for their executives.

But here is one essential thing.

Although a company of course could Offer stock-based compensation by withdrawing money from the bank, using it to buy shares in the open market (this would be one of the dreaded share buybacks), and then handing those shares over to the bank. leaders; in practice, it does not work that way. Amazon, or any other company, can simply issue more Amazon stock at any time. This costs Amazon shareholders because the creation of new shares tends to devalue existing shares, but this does not involve any direct financial cost to the company itself.

Here is what is even stranger. When the price of a company's shares increases significantly, the value of stock-based compensation also increases. It's by design. One of the goals of stock-based compensation is to make sure that you pay executive officers for their performance – or at least ensuring that grbadroots employees share in the prosperity of the company's shareholders. But this means that, from an accounting point of view, when the price of a company's shares increases significantly – as if it doubled its profits, for example – the value of the tax deduction for stock-based compensation increases. also a lot.

That's exactly what happened with Amazon. Thanks to a good year for the company, Form 10 (k) of the Securities and Exchange Commission says it has recorded about $ 1 billion in stock-based compensation deductions, eliminating what would otherwise have been a non-zero liability.