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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.