The New Tax Law has made it possible for Amazon to legally avoid paying any federal income tax. So how does Amazon pay no tax? Here are a few techniques that the multinational corporation used to eliminate its 2018 tax bill.
President Trump’s recent attack on Amazon for being a “tax cheat” may not have been accurate, but everyone agrees that the company is very good at finding ways to legally avoid paying taxes. Amazon is not only paying $0 in federal income taxes this year, but it has also claimed a rebate of $129 million – for an effective tax rate of minus one percent (-1%)!
So, how did one of the largest companies in the world manage to pay $0 in U.S. federal income tax despite the fact that it earned $11.2 billion in profits last year? Here are a few ways that Amazon has legally accomplished this tremendous feat:
Taking Full Advantage of the New Tax Law
Although Trump has been critical of Amazon paying no taxes, he has yet to acknowledge that it was his own administration’s corporate tax cuts that facilitated most of the company’s 2018 tax savings. First of all, the 2017 Tax Cuts and Jobs Act (TCJA) lowered the corporate tax rate from 35% to 21%. This reduced rate applies to current income and to payments deferred from previous years.
Reinvesting Profit
Since its inception, Amazon has continuously invested its profits into new facilities and equipment. By reinvesting much of its profit and offsetting those expenditures against the company’s taxable income, Amazon has been able to significantly lower its federal tax liability over the years.
In addition, the accelerated depreciation provisions of the new tax law must have been cause for celebration at the Amazon corporate headquarters. The TCJA increased bonus depreciation from 50% to 100% for depreciable business assets that have a recovery period of 20 years or less – that provision applies to all equipment, computers, appliances, machinery and equipment purchased by Amazon and placed in service since September 28, 2017.
Utilizing tax credits
Taking advantage of various business tax credits has also helped Amazon reduce its federal tax bill over the years. The company consistently qualifies for the Research and Development (R&D) Credit, among others, and currently has a reported $1.4 billion in tax credit carryforwards from previous years that it used to offset its current year tax liability.
Add to this additional tax breaks at the state and local levels, and you have significant tax savings all around.
Exercising executive stock options
Amazon also takes advantage of another tax provision that permits corporations to deduct the value of vested company shares distributed to their employees, including stock options given to executives.
Building a business strategy around tax loopholes
Amazon’s tremendous growth is due for the most part on its business strategy –to engage in business practices designed avoid taxes whenever possible, mainly by reinvesting as much of the company’s profits as possible on its continued growth.
This is what the U.S. corporate tax system is designed to do – provide tax breaks to companies that invest in themselves. Whether you believe that this is an abuse of the system or that it is needed to create more jobs to benefit the economy, there is no arguing that what Amazon is doing is legal under the current law and we salute the company’s tax attorneys on doing their job so well.
Amazon does pay some taxes, though…
Don’t be misled into thinking that Amazon pays no tax at all – it does pay hundreds of millions of dollars in state, local and employment taxes. It’s the least that a $800 billion company should do!
The Moskowitz, LLP Business Tax Group
One of the core principles of Moskowitz, LLP is that anyone with the drive and commitment to operate a profitable business should understand and benefit from the tax code. If you are ready to start a new business, or need assistance with tax planning for an existing one, contact our San Francisco, CA office today.