Americans think that corporations don’t pay enough in taxes. A recent survey by the Pew Research Center found that 64% of people were bothered by the idea that big businesses weren’t paying their fair share to the IRS.
Taxpayers have reason to be concerned about corporate tax dodging, according to a report from Citizens for Tax Justice (CTJ). Fifteen companies in a range of industries, including General Electric, CBS, Prudential, and Mattel paid virtually nothing in income taxes in 2014, despite generating U.S. profits of roughly $23 billion, the CTJ found.
A number of companies actually had negative tax burdens. In other words, they received money back from the federal government, sometimes hundreds of millions of dollars. CBS got a tax rebate of $235 million. PEPCO Holdings received $137 million. Prudential Financial got $106 million.
How do corporations end up paying less income tax than ordinary Americans? The answer lies in the byzantine U.S. tax code, which is chock full of potential deductions, credits, and other perfectly legally tricks that let huge companies completely eliminate their tax burden.
Some people think corporations should have to pay more. “[W]e need a tax system that demands that large, profitable corporations and the wealthy start paying their fair share in taxes,” said Rep. Bernie Sanders (I-Vt.) in a statement.
Corporate America and its supporters in Washington feel differently. When Congressional Republicans backed a $287 billion package of corporate tax breaks in July 2014, House Speaker John Boehner (R-Ohio) defended it by saying that it would “put more Americans back to work,” CNN reported.
Pro or con, big corporate tax breaks don’t look to be going anywhere in the immediate future. Here are four of the biggest strategies corporations use to shrink their tax bills, according to the CTJ.
1. Stock option write-offs
Case study: Priceline
Travel website Priceline has paid no corporate income tax for the past four years, in part because it’s been able to write off the value of executive stock options, says the CTJ.
Executives often receive stock options as a part of their compensation package. Companies are able to offer important staff more money without paying higher salaries, while CEOs and other corporate leaders can buy company stock at a relatively low price and then sell it later after its value has increased. (To give you an idea of how much those increases can be worth: One share of Priceline stock ended trading at $1,199.75 per share on April 13, 2015. Back on April 13, 1999, shortly after the company went public, the stock was worth $81.50 a share.)
Big corporations can also enjoy some pretty big tax benefits by making options part of its compensation package. The New York Times explained the process in a 2011 article:
“A stock option entitles its owner to buy a share of company stock at a set price over a specified period. The corporate tax savings stem from the fact that executives typically cash in stock options at a much higher price than the initial value that companies report to shareholders when they are granted. But companies are then allowed a tax deduction for that higher price.”
Former Sen. Carl Levin (D-Mich), who retired in early 2015, lobbied against this take perk for options for years, saying in a statement that it “makes no sense for taxpayers to subsidize pay for corporate executives.” But he made little headway in closing the loophole before he left the Senate.
2. Bonus depreciation
Case study: Ryder System
When companies make capital investments, they are allowed to write off the cost of those investments as the assets depreciate. Accelerated or “bonus” depreciation permits companies to write off that depreciation faster than it actually occurs. The tax perk is especially valuable to companies that invest in expensive equipment, like those in transportation and manufacturing.
Ryder is a transportation and supply chain management company, best known for its fleet of rental trucks. With the help of accelerated depreciation, the company was able to completely eliminate its corporate income tax burden in 2014 and even earned a rebate of $1 million. PG&E and PEPCO Holdings (both electric utilities) and airline Jetblue were also able to significantly cut their taxes using this strategy.
3. Tax breaks for research and development
Case study: Qualcomm
Tech company Qualcomm has taken advantage of more than $290 million in tax breaks for research and development in the past three years, according to the CTJ. Partly as a result of that credit, which is designed to encourage businesses to invest in new technology, it paid no tax on $3.2 billion in U.S. profits in 2014.
The research and development tax credit has been around since 1981, and was initially designed to boost the U.S. economy during a difficult recession. Today, the credit saves U.S. companies more than $12 billion a year, according to the Washington Post. Not surprisingly, San Diego-based Qualcomm is in favor of making the tax break permanent.
Two-thirds of large companies take advantage of the R&D credit, per the Wall Street Journal. Proponents of the credit says it rewards companies for investing in new products and technology, while critics say that many corporations are getting a hefty tax break for frivolous “research” or for normal business activities.
Qualcomm’s hardly the only company that gains a lot from this tax break. The Nation singled out Boeing for the same practice back in 2012, arguing that company, which is a major defense contractor, was “double-dipping,” by claiming a tax credit for research spending that had been paid for by Pentagon contracts.
4. Active financing
Case study: General Electric
For years, GE has been known for its aggressive avoidance of U.S. taxes. Its tax department alone had close to 1,000 employees in 2011. One of the many ways the company cuts its tax bill (which was just $51 million in 2014, despite earning $5.8 billion in U.S. profits) is by making use of the “active financing” tax loophole.
U.S. corporations are already able to shelter certain types of income earned abroad in offshore tax havens, avoiding paying income tax until that money returns to the United States. But the tax code doesn’t allow corporations to shelter passive income (such as money earned through interest, dividends, or royalties) in the same way. At least in theory.
In reality, many companies take advantage of the “active financing” exemption, which emerged in the 1990s following heavy lobbying by GE and other financial services companies. Those firms won changes that allowed them to avoid taxes on income earned from lending in foreign countries, the New York Times reported. GE depends so heavily on this particular tax break that the head of the company’s tax department reportedly got down on one knee and begged members of Congress to extend the loophole, according to a report from Americans for Tax Fairness.
GE’s dependence on this tax loophole may decrease in the future, however, since it’s in the process of selling off GE Capital, its banking and financial arm. That move could cause the company’s effective tax rate to double in the next few years, according to the Wall Street Journal.