CBS News has reported that 60 of the biggest American companies, including Amazon and Netflix, did not pay any taxes on $79 billion of profit in 2018. According to the Tax Cuts and Job Act’s 21 percent corporate tax rate, the companies should have paid $16.4 billion collectively in federal income taxes. Instead, they received a rebut of $4.3 billion.
This year’s new tax law lowered corporate taxes to 21 percent from the original 35 percent. Advocates of the new law say companies will raise investments and economic growth. Critics say the lessened income tax revenue will result in a growing deficit. They also contend that it will become more difficult to fund public programs.
The companies did nothing illegal- they simply relied on an abundance of legal loopholes to ensure that they would not pay taxes.
"The new law cut the statutory tax rate to 21 percent, while leaving intact most of the tax breaks that allowed profitable companies to zero out their income taxes," wrote Institute on Taxation and Economic Policy (ITEP) senior fellow Matthew Gardner, director of federal Steve Wamhoff and co-authors Mary Martellotta and Lorena Roque, in the report. "The result, unsurprisingly, has been a continued decline in our already-low corporate tax revenues."
Amazon, whose profits ballooned to $11.2 billion in 2018, paid no federal income taxes. In fact, the company received a federal income tax rebate of $129 million. Amazon has refuted the tax analysis, claiming that the profit margins on over $232 billion in revenue from 2018 remain in the single digits.
Amazon pays all the taxes we are required to pay in the U.S. and every country where we operate, including paying $2.6 billion in corporate tax [worldwide] and reporting $3.4 billion in tax expense over the last three years," the company said in a statement earlier this month. "Corporate tax is based on profits, not revenues, and our profits remain modest given retail is a highly competitive, low-margin business and our continued heavy investment," an Amazon spokesperson said.
Netflix, which boats $845 million in U.S. profit, is estimated to not have paid any income tax in 2018 as well. "When I say they paid zero, really what I mean is they reported a $22 million income tax rebate, so they have a negative income tax," Gardner said.
"When I say they paid zero, really what I mean is they reported a $22 million income tax rebate, so they have a negative income tax," Gardner said.
Companies are legally reducing their federal income taxes using both new and already existing tax breaks, such as net operating losses, stock options, tax credits, and accelerated depreciation tax breaks.
Net operating losses mean if a company loses money one year, they can use that loss to offset its tax bill in future, more profitable years. "Those negative amounts offset positive profits in future years, which happens all the time in cyclical businesses, not just during major depressions," tax analyst Marty Sullivan said.
Companies often compensate executives in stock options instead of cash, which helps lower cash burn and encourages executive ownership. "It's not an expense for the companies in the same sense that it would be if they just wrote employees a paycheck every two weeks. But companies are still allowed, for tax purposes, to pretend it's a cash expense," Gardner said.
Tax credits also help lower tax rates for profitable companies, and these tax credits do not have to be specific. Amazon, for example, received $419 million in tax credits in 2018, mostly for research and development. "R & D tax credits are a pretty big thing for them. It's a big chunk of the $419 million. It's hard to say where the rest came from," Gardner said. Amazon also gained tax credits because they built warehouses across the country. "If Amazon is building huge warehouse distribution centers, they can take enormous write-offs that are intended under the law. I would not jump to any negative conclusions based on the fact that they don't have any taxes," said tax analyst Marty Sullivan.
More, a new provision under the Tax Cuts and Job Act allows companies to expense inventory faster than before. Prior to the act, firms had to follow longer depreciation timelines. "Normally, you have to depreciate an asset to take a deduction for a purchase of an asset over several years, but under the new law, you can take it all in the first year," Sullivan said.
Gardner says that “it seems clear the new tax law” accelerated depreciation.
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