Facebook tax loophole draws fire

A protestor in front of the NASDAQ stock exchange in Times Square prior to the Facebook IPO. / EMMANUEL DUNAND/AFP/GettyImages

(MoneyWatch) Newly public technology titan. Cultural icon. Tax-dodger? Even as Facebook (FB) today lifted the curtain on its initial public offering, the Internet company is already being accused of seeking to avoid paying its fair share in taxes.

On the eve of Facebook's stock offering, Sen. Carl Levin, D, Mich., said Thursday that the social networking firm plans to claim tax deductions worth $16 billion, or the same sum the company raised in the IPO. A Facebook regulatory filing confirmed that the company intends to take the huge deduction. That would enable Facebook to collect a $500 million tax refund spanning the last two years and effectively zero out its 2012 tax bill, the Michigan Democrat said in remarks from the Senate floor.

Facebook also plans to capitalize on its massive deductions to create a "net operating loss" -- a legal corporate bookkeeping maneuver under which companies may use past financial losses to offset future taxable income -- to reduce its taxes for years to come, Levin said in attacking what he described as a gigantic tax loophole. Facebook did not immediately respond to a request for comment.

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U.S. tax law allows Facebook to deduct hundreds of millions of dollars' worth of stock options that the social networker has issued to CEO Mark Zuckerberg and other top company executives, Levin contends. In its accounting, that means Facebook can record the value of these options at only a few cents per share.

The tax savings come down the road when Facebook files its taxes and books the options at closer to their market value, which hovered around $38 in afternoon trading Friday. The company could then deduct that larger amount, according to the Sunlight Foundation, a Washington advocacy group for government and corporate transparency.

"As with so much of our tax code, it is not the lawbreaking that shocks the conscience, it is the stuff that is allowed... . Facebook's $16 billion tax deduction brings the issue into sharp focus," Levin said. "This profitable corporation will stop paying any federal corporate income taxes simply because it gave hundreds of millions of stock options to its executives. It will go from a corporate citizen that paid its taxes, to one that not only pays no taxes to Uncle Sam on its profits, but gets a tax refund." 

Martin Sullivan, chief economist at publisher Tax Analysts, notes that companies are allowed under the law to deduct the value of their expenses. But he agrees that the deductibility of stock options amounts to a loophole. In essence, Facebook is allowed to take a tax deduction that may not match up with its future income. "The problem is that Facebook isn't paying any taxes on this incredible accumulation of value," he said. "The company is now worth somewhere north of $100 billion, and they should be paying taxes on that increase in value."

Facebook has also recently drawn fire over reports alleging that company co-founder Eduardo Saverin had renounced his U.S. citizenship and moved to Singapore to escape paying federal income tax. Saverin, a native of Brazil who helped Facebook get off the ground while a classmate of Zuckerberg at Harvard University, ended his professional relationship with the company years ago. 

Saverin pushed back this week against the claim that he had left the country to dodge taxes, telling The New York Times that he will owe "hundreds of millions of dollars" in taxes to the U.S. government. But that has not stopped lawmakers in Washington from blasting Saverin. Sens. Charles Schumer, D.-N.Y., and Bob Casey, D-Pa., have introduced a bill that would "presume" that any U.S. expatriate with a net worth of at least $2 million and an average income-tax bill of at least $148,000 over the last five years has renounced their citizenship specifically to avoid taxes.

"We simply cannot allow the ultra-wealthy to write their own rules," said Sen. Casey in a statement Thursday in presenting the measure. "Mr. Saverin has benefited greatly from being a citizen of the United States but he has chosen to cast it aside and leave U.S. taxpayers with the bill. Renouncing citizenship to simply avoid paying your fair share is an insult to middle-class Americans, and we will not accept it."

A divided Congress means the law is unlikely to pass anytime soon, if ever. But the tough talk underscores the new political complexities confronting Facebook now that it is public. Like Apple (AAPL), GE (GE), Google (GOOG), and other U.S. multinationals accused of dodging taxes in recent years, Facebook is now an open book required to disclose how it does business. And because its popularity is central to the company's business model and growth, Facebook's reputation as a good corporate citizen is likely to matter more than ever.

For now, such concerns are unlikely to discourage the millions of investors eager to buy a piece of Facebook, said Bill Allison, editorial director of the Sunlight Foundation. But with shareholder activism growing as investors seek greater influence in managing companies, that could change. "There's potential for shareholders to push companies in a different direction," he said.

[bob77O21]

What element of satire are you not understanding?

[bob77O21]

the above was addressed to hypnotoad72, in response to his "Most CEOs tend to donate (read "invest") on both sides of the aisle. They play both sides, and their supporters (we, the voters) as chumps and for their personal gain.

If Romney wins, be prepared to eat a big crow pie the moment you find out Zucker there is making you the sucker. Given your rabid stereotyping of Obama and his supporters while ignoring previous historical leaders (your own messiah Reagan was responsible for a juicy tax increase as well...)" reply to sevenlucky7's tongue-in-cheek post.

[bob77O21]

the above was addressed to hypnotoad72, in response to his "Most CEOs tend to donate (read "invest") on both sides of the aisle. They play both sides, and their supporters (we, the voters) as chumps and for their personal gain.

If Romney wins, be prepared to eat a big crow pie the moment you find out Zucker there is making you the sucker. Given your rabid stereotyping of Obama and his supporters while ignoring previous historical leaders (your own messiah Reagan was responsible for a juicy tax increase as well...)" reply to sevenlucky7's tongue-in-cheek post.

[Eljay43]

Wow, this article really fails to mention the fact that the deduction exists to prevent double taxation on employee compensation? Facebook employees will pay taxes on these options, which means hitting Facebook with a tax as well would discourage companies from ever issuing stock options. Every other company in America deducts labor costs from their potential tax liability.

[jimcrawf0rd]

What could Sen. Casey possibly mean by saying that ''We simply cannot allow the ultra-wealthy to write their own rules''? We've been doing exactly that for over 230 years, why stop now?

Despite the millions of our citizens who still live in poverty, the hundreds of thousands of homeless across the nation, the badly educated, the underpaid, the ill housed, the ill fed, and, as Charles Dickens put it, ''dying thus around us every day,'' the words of John Jay, first Chief Justice of the United States Supreme Court, still hold true for our 1%: ''Those who own the country ought to govern it.''

jim crawford Westwood NJ

[hypnotoad72]

This country was founded and maintained with slave labor. Some said "Why stop now?" Others said "Let's evolve". In turn, there was a cool 5 year war, where the President of the time acknowledged that labor created ALL wealth. A-L-L of it. Period.

A democracy does not let a small group of people create the rules that control everyone else. That's an oligarchy or plutocracy. Or fascism.

[texmary]

The tax codes were written to protect "some group" Who wrote this laws? Congress? Both parties are responsible...but they will never admit it. Yes, "some" will say changes should be made......right, does anyone believe them? Untill we get some congress members who truly want to help our country and correct tax loopholes such as this one......things will continue. One simple step all Americans can take is this one: VOTE OUT ALL INCUMBENTS IN CONGRESS Nov.2012

[hypnotoad72]

What will the newly elected folks do? How quickly might they be bought, assuming they're not already bought?

[bobbyo11]

This author either knows nothing about the tax law or he is intentionally trying to mislead readers. Under the tax law, Facebook can deduct the value of stock options ONLY when the individuals holding the options include the same amount in their taxable income. So the corporation doesn't pay tax on this value but the option holders pay tax and at indivdual tax rates which are higher than corporate tax rates. So Uncle Sam will get it's 35% and Cailifornia it's 10%. So where is the loophole?

[vjoharmon]

Well, I see that stock taking a plunge!

[credibility2]

If the loophole is legal and businesses use it, those flapping their leftist jaws with their sanctimony and hypocrisy should just shut up.

[hypnotoad72]

Be careful what you wish for, since liberals are usually lambasted as wanting special handouts and things, which is what loopholes tend to give out... are you a liberal? By your own past definitions, you now qualify... thank you!

But, in seriousness, you might try reading this: Somebody might make a loophole that, despite being legal, might affect you... don't be so blindly cheery. Holy sanctimony indeed. ;)

[DesertRat7303]

"No longer will the United States allow a million-page tax system that makes no logical sense and one that even a massive team of tax attorneys can't figure out. If we can send a man to the moon and locate distant planets with our mathematical skills, so can we create a simple and fair tax system that benefits the citizens of this great nation to cure our national dept and create a utopian society for the benefit of our children." -The Next Great Politician

"We simply cannot allow the ultra-wealthy to write their own rules." Mr. Saverin has benefited greatly from being a citizen of the United States but he has chosen to cast it aside and leave U.S. taxpayers with the bill. Renouncing citizenship to simply avoid paying your fair share is an insult to middle-class Americans, and we will not accept it." -Senator Robert Casey

See, anybody can come up with cool sound bites! No hard work involved, just a lot of "yabada yabada".

[hypnotoad72]

Corporations have zero loyalty here, so why do we keep giving them handouts and entitlements?

Also, this is worth reading:
http://www.southernstudies.org/2012/02/facebooks-dubious-social-mission.html

[VincentLawrence]

Politicians should be the last to complain about LOOP HOLES in the Tax Code, the politicians built them there for their campaign contributors,
when an outsider takes advantage of the existing laws the politicians cry foul.
The Tax Code is a nightmare, it should be simplified, and cleaned up, close all the favored donor Loop Holes.
Corruption breads corruption, and "THE PIRATES OF THE POTOMAC" 'Congress' is drowning the Good People of this Great Nation with the Pirates sludge.
Watch the Insanely Reckless Spending, and Fix the Tax Code.
IF You can not fix these thing, STEP DOWN, and let some one else do the JOB.
Search "U.S. NATIONAL DEBT CLOCK" GET THE FACTS.

[hypnotoad72]

Here's another fact:

Politicians voted 'no' to stop giving handouts to corporations that offshore jobs (which in return creates a revenue problem, believe it or not). Here are some examples of politicians propping up leeches:

http://www.ontheissues.org/senate/Rick_Santorum.htm#Corporations
http://www.ontheissues.org/senate/mitch_mcconnell.htm#Corporations
http://www.ontheissues.org/john_mccain.htm#Corporations
http://www.issues2000.org/senate/Judd_Gregg.htm#Corporations
http://www.ontheissues.org/senate/jim_demint.htm#Corporations
http://www.ontheissues.org/senate/Orrin_Hatch.htm#Corporations
http://www.ontheissues.org/Senate/Chuck_Grassley.htm#Corporations

"Voted NO on repealing tax subsidy for companies which move US jobs offshore. (Mar 2005)"


Some leeches even go to congress and openly lie:

http://www.mydd.com/story/2007/2/7/184312/5388

(one example of how much that particular leech gets, amongst others...)
http://www.ctj.org/html/corp0402.htm

[reubenrcbs]

And we wonder why the country is having problems? It would seem that nothing is likely to change, if it is dependent on Congress and the Senate to do something. These people are already factored in on the corporate loss side of the ledger under payoffs. It would seem the fairest way to get around all of this would be to not use Facebook. Less fair but still reasonable would be to charge a fee to Facebook each time some one logs on to it. Then they can declare all the losses they want and still the American public would experience the gain of the use tax as an income.

[hypnotoad72]

People need to realize that, as users of facebook, they are PRODUCTS BEING SOLD. Not customers/consumers/whatever.

They might not care, nor might they always care when an opt-in privacy policy change gets put out (quietly or otherwise)... and why should they care? They're product. Not people. But their inaction screws everyone else over.