Monday, February 18, 2013

Facebook earns over a billion but ends up with net tax benefits of over $400 million

Facebook manages to get a $429 million net tax refund. The refund is not because Facebook had a loss. Facebook earned almost $1.1 billion in profits during 2012.
Corporations are able to claim deductions that are not available to individual filers. In Facebook's case the company is able to deduct executive stock options that are used as part of their compensation:"That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million."
This situation is not unique to Facebook. Many large corporations use stock options to compensate not just executives but other employees. The options allow the holders to buy stocks at favorable prices in the future. When the options are exercised the corporations are able to deduct the difference between what the employee paid for the stock and what it is worth. The employee is required to report this difference as a taxable wage. This article reports that 185 other large corporations also use this tax deduction.
There is nothing illegal about what Facebook and the other corporations are doing. The conceptual basis for the deduction is that the non-cash compensation such as these stock options can be thought of as equivalent to a certain cash compensation and hence an expense just as salary, that reduces profit and thus taxes.
Facebook relies more on stock options and restricted stock units as a form of compensation than many corporations. A lot of these were paid out when it was a private company and are now being exercised and so appear on the company books as a deduction.
In Facebook financial statements you won't actually find any $429 million tax refund. In fact the company claims that it had a $559 billion tax liability for 2012. Yet, in a footnote the records point out that Facebook had a $1.03 billion "excess tax benefit" last year that was related to “stock option exercises and other equity awards.” Factoring this amount in turns the over half a billion tax liability into a refund!
Facebook has even more of these offsetting amounts in the bank for future use to the tune of $2.7 billion that it can carry forward. A spokesperson for Facebook Ashley Zandy would not discuss the tax break but referred to Chief Financial Officer, David Ebersman's conference call with analysts. Ebersman said in the call that the company ended the year with nearly $10 billion in cash as well as the accumulated tax benefits. He said that this gave the company great flexibility and risk protection.
Facebook was a private company until an Initial Public Offering (IPO) was offered on May 17, 2012. The share price was $38 a share. The company was valued at $104 billion. The share value soon dropped, as shares were grossly overvalued. The latest stock value on February 15 was $28.52 still well below its initial value.

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