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Tuesday, July 16, 2013

Companies that pay no federal income taxes

Tax avoidance is facilitated by savvy accountants and lawyers
Exemptions and loopholes lower corporate tax rates
While the debate continues to rage over whether or not wealthy Americans are paying their fair share of taxes, and whether or not we should raise or lower tax rates for individuals, there is another direction in which the government can turn.

Perhaps we should be turning to a meaningful conversation about reformation of the corporate tax code, where the most egregious offenses lie? The United States has the highest corporate tax rate in the world, but the numerous exemptions and loopholes combine to bring the average company’s effective tax rate down to a faction of that.

However, like the individual income tax code, it is the wealthy corporations with the savvy accountants and lawyers who can benefit from so-called “tax avoidance” maneuvers, and the small-to-medium companies who suffer the full hit.

Apple: Apple executives were actually called in to Congress to testify about the company’s corporate tax situation in May. While everyone ultimately agrees that the “loopholes” that Apple employs are perfectly legal, the ethical question is whether or not Apple *should* be paying more. The company generates massive amounts of cash from overseas businesses, and it tends to allow that cash to remain out of the country. By bringing the cash back into the United States, the company would pay taxes of up to 35% on it. Instead, Apple keeps its cash overseas and borrows against it, at low interest rates, in order to fund activity such as share repurchases and dividend distributions.

Apple’s overseas holdings are not the only ones – other big companies that avoid paying taxes on repatriated cash include Microsoft, Dell, and Nike, are estimated to be avoiding approximately $92 billion in taxes by keeping their money outside of the United States.

Facebook: Facebook management takes advantage of a loophole that permits stock options awarded to executives (which have no intrinsic cost to the company) to be written off as an expense, as if they were cash payments. Using this single action, Facebook was able to eliminate its entire tax liability for 2012.

Exxon Mobil: 39 percent of its employees, 33 percent of its sales, 40 percent of its long-lived assets, and 70 to 90 percent of its productive oil and gas wells are all in the United States, but the company claims that only 15 percent of its income is earned here. The company pays only 2.2 percent of its total income in U.S. taxes.

General Electric: The company employs half of its workers and generates half of its revenue in the United States. But the Citizens for Tax Justice found that GE paid a tax rate of just 1.8% to the federal government between 2002 and 2011, despite making $81 billion in profits during those years.

Bank of America: B of A earned 82 percent of its 2011-12 revenue within the U.S., declared $7 billion in U.S. losses and $10 billion in foreign profits. Bank of America did not pay any federal taxes in 2011, and claimed a tax refund of $12 billion.

The GAO states large U.S. companies only pay an average tax rate of 12.6%
20% of top 500 firms paid no tax in 2011 per study

Other Studies

The website Nerdwallet conducted a study in 2012 and discovered that many of the top 500 companies in the country pay very little in corporate income taxes.  For the 2011 tax year, the ten most profitable companies paid only 9% in taxes to the U.S. government. This is a far cry from the 35% top tax rate that most businessmen and politicians frequently complain about. 20% of the top 500 companies paid no tax in 2011. 42% paid something, but it amounted to less than 15%.

The GAO (Government Accountability Office) has determined that, on average, large profitable American corporations pay an effective income tax rate of 12.6% in 2010. Factoring in foreign, state and local taxes brings this number to 16.9%, still a far cry from the 35% top marginal tax rate.

So the next time you get involved in a tax debate, mention that corporate tax reform would be far more effective at raising revenues than any further increases on individuals. If we can get some of that corporate money into the Treasury, we might not even need to be having this debate about whether or not people are paying their fair share.

About the author: This article was written by Simon a longtime contributor to various financial, accounting, taxation blogs and he is the manager and writer of the accounting blog of Wallace & Associates Encino CPA. In his free time he also writes his own online marketing and management blog simonsblogpark.com.
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