Why Corporations Pay Less Taxes than You

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While you may be dutifully sending off 25 percent or more of your income to the federal government each year, corporations are sharing a whole lot less with Uncle Sam.

According to a 2013 report from the U.S. Government Accountability Office, profitable corporations paid a mere 13 percent in federal income taxes in 2010. For comparison, the statutory tax rate – that’s the one set forth in law – is 35 percent.

So how do corporations get away with paying only 13 percent of their income in taxes when they should be paying 35 percent?

One word: loopholes.

Or, if you’re feeling generous, let’s call it creative accounting.

Money Talks News finance expert Stacy Johnson has more on that in the video below. Watch it and then scroll down to see where I break down the details.

Corporations taking money on a permanent vacation

It might surprise you to hear that a single building in the Cayman Islands serves as the address for nearly 19,000 businesses. At least that’s according to a report issued by advocacy groups U.S. Public Interest Research Group and Citizens for Tax Justice.

Using offshore tax havens appears to be the No. 1 way corporations avoid paying U.S. income tax. They (legally) set up subsidiaries in foreign countries – usually ones that charge no or low taxes – and then credit profits to those shell companies.

U.S. PIRG and Citizens for Tax Justice say Apple is the biggest offender, having booked more than $111 billion offshore in 2013. Of course, Apple says it pays every penny it owes and, technically, that’s correct.

However, when the company CEO testified to Congress in 2013 and said the company’s federal tax rate was 30.5 percent, some said it wasn’t the full picture. According to research cited by Bloomberg, Apple pays a tax rate of just 14 percent worldwide. “Apple has attributed $30 billion in income since 2009 to an affiliate that is incorporated in Ireland, where it has no employees,” Bloomberg said. That affiliate pays a tax rate of 2 percent.

Staying one step ahead of the game

It should be stressed that all of this is perfectly legal. We can debate the ethics, but the law says it’s OK. Not that the government hasn’t tried to curtail some of these practices. It’s just that the companies are staying one step ahead of the game.

When Congress cut off tax benefits for profits made by businesses in Puerto Rico, companies simply transferred those profits to the Cayman Islands instead. Other firms have taken to acquiring foreign companies and then moving their headquarters to the foreign site in an increasingly popular tactic known as tax inversion.

President Barack Obama has called for an end to tax inversion and legislation is being drafted, but it remains to be seen whether it will pass and whether it would have the desired effect. It may simply send businesses back to the books to find other creative ways to lower their tax burden.

Other ways corporations avoid taxes

While offshore tax havens may have the highest profile when it comes to corporate tax avoidance, they aren’t the only way businesses save money.

Another way is accelerated depreciation. Under IRS rules, in some cases businesses can accelerate the depreciation of equipment and similar assets. Using this method, companies may be able to double their tax deduction in the first year after some new purchases. Businesses with corporate jets also benefit from a loophole that allows them to depreciate their planes on a five-year schedule compared with the seven-year schedule followed by airlines.

Then there’s the “excess stock option” tax break, which Citizens for Tax Justice said saved 280 Fortune 500 companies a total of $27 billion in federal and state income taxes in a recent three-year period. The group said Facebook used that tax break “to avoid paying even a dime of federal and state income taxes in 2012.”

Finally, while not a corporate loophole per se, business executives get their own special perks. For example, hedge fund managers can claim their income as capital gains, which means they pay only 20 percent rather than the up to 39.6 percent marginal tax rate they may otherwise be on the hook for.

The world of corporate tax avoidance is wide and deep. For more reading, Bloomberg has a series of articles on the subject. You might want to take some antacid first because what you read could give you indigestion.

Some argue that corporate tax loopholes encourage business growth and job creation. Others say it’s an unfair manipulation of the tax code.

What say you? Sound off in the comments below or on our Facebook page.

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Comments & discussion

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  • laracraftmili

    Start working at home with Google! It’s by-far the>>CLICK NEXT TAB FOR MORE INFO AND HELP

  • Phillip McMurran

    My question would be how many congressmen have company’s that take advantage of this? I would bet there are a lot of them. Getting that changed would be impossible.

  • pennyhammack

    One of the ways that businesses manage to avoid taxes is called “cost of doing business”. In other words they can deduct the salaries they pay their workers, the electricity that they use, the expense of purchasing supplies, etc. etc. If an individual could declare himself a business and deduct the “cost of actually living” i.e. rent, food, transportation, clothing etc.etc. she/he could use tax breaks too. But..congress and the IRS would jump all over that because collected taxes would virtually disappear.

    • http://www.kennethballard.com Kenneth

      Many individuals do declare themselves as businesses, but they still don’t get that kind of leeway. That’s what independent contractors do, and they declare their income under Schedule C on the 1040 unless they’ve formed into a corporation — as opposed to a limited liability company, since those are still taxed at individual income tax rates on Schedule C, not on a different tax form like corporations. Having any Schedule C income over the minimum threshold (I think it’s $400) subjects you to a mandatory 15.3% tax on the Schedule C portion in addition to the overall taxes calculated on your adjusted gross income, of which your Schedule C income is a portion.

      But Schedule C doesn’t give you nearly the leeway for deductions that corporations enjoy. Trust me, I wish individuals could deduct their living expenses from their income taxes, but that would virtually defeat the purpose of an income tax as, like you said, tax revenue would dry up as a result. Many would end up paying virtually nothing in taxes, and most would pay a fraction of their current level.

  • Petunia100

    Accelerated depreciation is allowed to encourage business to spend money on fixed assets and capital improvements. Spending drives our economy. When businesses stop spending, our economy comes to a screeching halt. Accelerated depreciation is a good thing.

  • Kent

    Inauthenticity to the max. Corporations want to be regarded as individuals when it is convenient but not when it comes time to pay taxes.

    • Jim Wiggins

      Do you pay your “authentic” tax burden or your legal tax burden?

  • Jim Wiggins

    Like Apple, most corporations follow the tax code as currently written and interpreted. I personally always take every tax exemption and accept every tax credit to which I an legally permitted. I suspect most of us do. If you think corporations are under-taxed, or over-taxed, seek to change the law.

    • http://www.moneytalksnews.com/ Stacy Johnson

      That’s exactly the point of this story, Jim. As we said in the story, corporations are following the law. But if the law puts me in a 35 percent bracket and Apple in a 13 percent bracket, despite Apple making $500 million/week, then the law isn’t fair. And the reason the law isn’t fair is because corporations can afford to lobby lawmakers and I can’t. Which means that our democracy isn’t representative, which is what the constitution intended.

      That’s why we did this story: to point that out. People can’t change what they don’t understand. The purpose of the story was to help people become cognizant, and thus incite change.

      • Najla2

        Thank you for the article. It is possible to change the law.. Difficult because as said above the politicians get so many spiffs from corporations the only way to change. But if all the voters start banning together and pressuring congress. I have helped make a minor change in an Arizona law regarding mental health I wrote letters to all politician both incumbent and proposed, TV stations and radio stations. …. Pretty much one letter and go invited by a local mental health agency to testify before our Senate. There is power in numbers. The public has to stand together. It is not about which party.

      • Kori

        Question Stacy–If a corporation makes a dollar and taxed 13 Cents and pays a dividend on say 20 cents to an individual who then pays tax at 35%, how much tax is paid on the dollar? And you left that part out. Also how many individuals pay not tax but get money from the government? Just askin.

        • http://www.moneytalksnews.com/ Stacy Johnson

          What’s your point? Are you saying you think it’s OK for a hedge fund manager making $1 billion a year or a corporation making $7 billion every quarter to be in a lower bracket than you? While I respect anyone’s right to an opinion, yours appears indefensible. It’s also confusing, since it’s against your own self interests.

  • https://blu177.mail.live.com/default.aspx?id=64855&rru=inbox#tid=cm_fvxwooD5BGZFdidZ18lqA2&fid=flinbox Joe

    corporations don’t pay taxes. customers do. the tax is passed along to the customer with a markup like any other expense. the difference is now we have to pay the tax along with a 30% profit to the corp.

  • Lorilu

    If a corporation is a public corporation that pays dividends to shareholders, the shareholders must declare those dividends on their income tax return and pay taxes on it. Then the corporation is also expected to pay taxes on income. The government is getting paid twice, then, isn’t it?

    • http://ecofrugality.blogspot.com/ Amy Livingston

      By that argument, you could say the government gets paid an infinite number of times on every dollar. When I earn a dollar, I pay income tax; when I spend that dollar, I pay sales tax; the dollar goes into the hands of the business, which must also pay tax on it as earnings; if the company spends that dollar, it pays sales tax–and so on ad infinitum! But it’s not the dollar that’s being taxed; it’s the transaction. The company earns income, so it pays taxes on that; the shareholders earn dividends, so they pay taxes on those. Two different transactions.

      • Lorilu

        Perhaps. But consider that the dividends paid to shareholders ARE part of the company’s income, what is left of earnings after taxes. That’s double taxation of the same corporate profit.

        An equivalent situation would be if you paid taxes on your paycheck each week, then gave your kids their allowances, and the IRS taxed your kids on the amount you gave them.

        • http://www.moneytalksnews.com/ Stacy Johnson

          Yes, dividend income is an example of double taxation, plain and simple.

  • freedomlover@toronto

    Corporate taxes are ultimately paid by shareholders, workers, and/or consumers, with the proportion depending on their relative power.

    Here is how it works.

    1. An increased tax on corporations hits investors with lower profits; weaker firms are put out of business.
    2. Investors respond to this by investing less in corporations.
    3. This reduced investment means there is less capital with which remaining corporations can use to buy equipment, materials, and hire workers.
    4. With less capital and less workers, fewer goods get produced.
    5. Lower supply means higher prices for consumers.

    Conclusion: investors lose, then workers lose, then consumers.

    Every bit of the misery that government causes – lost savings, unemployment, inflation, indebtedness – will help improve the position of the government. What do most people do when hit with a bad economy? Cry for more government help, and accede to any government demand for more taxes, more spending authority. Economic hardship also causes more people to join the black market and take up illegal activities. Another excuse for the government to acquire more money and power, to fight the “growing wave of lawlessness”.

    It is important to note therefore that going out to vote is highly unlikely to “fix” government or even improve it, not even slightly. Government benefits from hurting the public. All political parties are the same in this regard, because the important distinction is not the rhetorical differences in party vs. party, but the fundamental difference between the factors that benefit government vs. public.

  • Vincent

    Perfectly fine with me. If the government would use a flat tax rate for everyone or lower their taxes then we would have billions of dollars going to our government and businesses would leave their money in the US. Also, they don’t tell you that most businesses pay capital gains taxes which is an extra tax on profits they make. So they are actually getting taxed twice because they were originally taxed on their money used for the investment then taxed on their profits they made.

    • http://www.moneytalksnews.com/ Stacy Johnson

      Capital gains tax is due on profits from the sale of assets. It’s merely a different tax schedule, not an example of double taxation. Both individuals and businesses pay capital gains tax.

  • medocadvikian

    First, we need to get over the idea that corporations pay any taxes. They simply pass the taxes on to consumers and the price goes up. So, if we foolishly continue to demand payment from these corporations, be prepared to pay more for their goods and services. You will pay more with your already taxed money!!!

    • http://www.moneytalksnews.com/ Stacy Johnson

      Well, if that’s the case, then why don’t we just let corporations pay no taxes at all. Then, rather than being foolish, we’d all save a bundle.

      The idea behind paying taxes is to provide for our common defense, as well as funding social programs, education and infrastructure that benefit our country and its citizens. Letting corporations avoid paying their fair share leaves only two possibilities. Programs will be cut or you, me and our fellow citizens will be left with a larger bill.

      This isn’t rocket science. Demanding payment from corporations for the services they receive from society isn’t foolish. It’s what’s right. And why someone would argue against their own self interests – offering to shoulder more of the burden so corporations shoulder less – is unbelievable.

      And btw, when corporations pay taxes, their only option isn’t raising prices. Another option they have is ONLY one one you and I have when confronted with taxes: namely, making less money.

      • http://www.kennethballard.com Kenneth

        And why someone would argue against their own self interests – offering
        to shoulder more of the burden so corporations shoulder less – is
        unbelievable.

        Stacy, we already shoulder the burden on corporate taxes. Here’s the simplified version: all costs of business are paid by their customers. A tax on business is therefore an indirect tax on consumers. You just don’t see that cost because it’s all rolled into the shelf price you pay on whatever you buy.

        So if all taxes on business earnings (which “earnings” means the profit plus other non-allowable deductions) were eliminated, they would be replaced by higher consumption taxes (i.e. sales taxes), higher production taxes (what the EU calls the “value added tax”, similar to what’s rolled into the price of a gallon of gasoline), or higher income taxes on individuals. There’ll be some pain in the short run, but I can guarantee you that the government would make up for it in short order by taxing whatever they can get away with.