Maybe you’ve heard about this: Netflix and Amazon paid $0 in federal income taxes for 2018.
How could this happen?
What exactly are the tax loopholes that got them out of it?
Every time you buy a product on Amazon and you must review and confirm your order, it is likely that you will see a line for taxes added. What you may not see is that this tax rate will vary from state to state in the US.
Sales taxes are mandated by the individual states themselves. This is totally unlike, say, Europe, where value-added taxes (VAT) have been slapped on to consumer goods uniformly for quite a while now.
States also set their own corporate income tax, which varies from 0% to 12% (this is taken on top of the federal corporate tax rate of 21%).
So, if you are an internet company, it can be difficult to figure out how taxes are paid by consumers in different states/around the world when dealing with a company based in one state.
Netflix paid $0 in federal income taxes in 2018.
But they earned $854 million. So how can this be?
The truth is that nobody knows exactly how it happened. Netflix is being strategically tightlipped about this situation, but we can check out their reported deferred tax assets(future taxes paid ahead of time) and make a few guesses.
The most likely answer lies in tax credits. Let’s not forget that Netflix paid $131 million in foreign taxes in 2018; it’s possible they were given a break and not forced to pay double.
The obvious next question to ask is: how did Netflix, a company primarily operating in the US, find a way to ensure that so much of its assets are allocated overseas? We will probably never know.
Amazon paid an 11.4% federal tax rate from 2011 to 2016 (even though officially the federal corporate tax rate was 35% during that time). In 2017 they also paid no federal corporate income taxes.
Their rate this year? -1%.
Even though Trump has tweeted about disliking the fact that Amazon pays so little in taxes, it’s actually a result of his own Tax Cuts and Jobs Act.
But the US corporate tax rate is supposed to be 21% right?
Once again, it’s chalked up to tax credits. Amazon also operates in 13 countries; perhaps the taxes they have already had to pay internationally were counted as credit.
Perhaps it was tax breaks for executive stock options. Around 2013 this specific issue came up when Facebook and Apple were able to avoid paying their full amount of corporate taxes. How does it work? Basically, executives in a company are given the option to purchase company stocks for a lower price than market value and then the company gets to deduct the difference between what they paid and what the actual value is.
For instance, when Facebook went public in 2012 Mark Zuckerburg had the option to purchase 120 million shares for 6 cents per share when the public price was $38 per share. That difference was calculated into a tax break and created a situation in which their $1.1 billion in pretax profits qualified for no corporate income taxes and yet somehow got them $429 million in refunds.
However, around that time it was found that of the top 500 publically traded companies from 2010-2012, 280 of them disclosed excessive tax savings from this loophole specifically.
Turns out that most big-time real estate investors can pay little to no taxes easily. This is because the IRS allows businesses to write off depreciation on buildings, even though the market value of the buildings may be growing year by year.
Trump knows something that lots of businesspeople with their hands in many pots know: sometimes it’s good for one or more of your assets to depreciate or operate at a loss. That way you can claim this loss as a reason not to owe taxes on other successful ventures; the IRS lets it happen all the time.