“We don’t pay taxes. Only the little people pay taxes…” -Leona Helmsley
Facebook is in the news once more. Apparently, they reported $1.1 billion in pre-tax profits from U.S. operations in 2012, but will pay little if any tax. In fact, Facebook may even receive a federal tax refund of about $429 million! The reason–it was able to expense items such as grants of restricted stock in the company that was paid to employees in lieu of traditional cash compensation.
Advocacy groups like Citizens For Tax Justice are very upset about this (see http://www.businessinsider.com/why-facebook-gets-an-income-tax-refund-2013-2). But, it is not as if no tax is paid at all. When restricted stock vests, the employee is taxed on the value of those shares at ordinary income tax rates and in high tax states such as California, the combined federal and state tax rate (around 50%) is downright confiscatory.
The real reason why some people are up in arms is that the grant of restricted stock, options, etc., doesn’t cost Facebook one dime. No money ever changes hands, yet Facebook is getting a huge income tax deduction as if they had spent billions on employee salary. The result of all this is that the balance sheet looks great (remember, Facebook gets to hold onto its cash) even though the income tax return shows a net loss. Only in America!
What isn’t really being discussed here is the importance of where you live when you earn your money. For instance, suppose that you are an employee of Facebook and you receive one $1 million in restricted stock. If you earned that compensation while working in Silicon Valley, you are looking at a California tax bill in excess of $130,000 when that restricted stock vests.
On the other hand, suppose instead that you are working at the Facebook offices in Austin, Texas, and receive the exact same compensation package. Texas has no state income tax. This means that you get to keep that same $130,000 upon vesting. As it turns out, Facebook did indeed open an office in Austin, Texas, about two years ago. That’s about two years before their IPO. I also hear that they are expanding their workforce down there. Coincidence?