With tax time rapidly approaching, you’re probably already starting to organize your tax documents from last year. And if you’re like most of us, tax time can be stressful. But for some businesses—including Amazon, General Motors, and Chevron—preparing a return doesn’t necessarily mean owing (or paying) income taxes. Last year, dozens of large corporations in industries ranging from automakers and airlines to technology and energy firms paid little or zero federal income tax, despite earning billions in pre-tax income. So how are some corporations able to reduce their tax obligation to zero or even below? Let’s take a look.
Changes to Federal Corporate Tax Law
A lot has changed in the way corporations are taxed by the federal government. Since the days of Ronald Reagan, the federal tax structure has become far more business-friendly. And though the U.S. had maintained a high corporate tax rate (35%), there were many credits and deductions that allowed businesses to lower their tax burden. Offshoring assets and operations is just one way corporations have been able to reduce their U.S. tax obligations. Companies like General Electric have long focused on growth in areas outside the U.S. where land and labor costs are lower.
Compounding the issue is former President Trump’s 2017 tax package, which lowered the corporate tax rate from 35% to 21%. The sweeping tax bill also provided new tax breaks to businesses, allowing some corporations to pay no tax at all—and even to qualify for substantial refunds. The long-term effects of the Trump tax cuts point toward significant increases in the federal deficit, possibly by as much as $1 trillion by 2022.
Book Income vs. Taxable Income
The way in which corporate tax is assessed has a lot to do with our current situation. For example, let’s look at the disparity between “book income” (the income data reported by a corporation in its financial statements) and “taxable income” (the corporation’s taxable income as defined by the U.S. tax code). The way businesses calculate their book income is determined by accounting industry standards, whereas taxable income is determined by tax regulations and public policy standards. Larger entities are required to reconcile their book income and taxable income figures annually, and while it’s expected that the two figures be approximately equal, they frequently are not. This is the result of significant deductions, credits, and other provisions that can help corporations lower their tax obligation.
A Note on Net Operating Losses (NOL)
One provision that allows business to distribute economic losses over more than one calendar year is that of net operating losses (NOL). For example, if a company takes a loss in one year but rebounds to profitability the next, it can carry the previous year loss forward into the more profitable year to reduce its overall tax obligation.
How Deep Does This Go?
According to Citizens for Tax Justice, 22 profitable Fortune 500 Companies paid no federal income tax during the period 2008–2012, largely due to the economic recession that followed the mortgage crisis. Among the more egregious in avoiding U.S. tax is General Electric, which received $3.1B in refunds against a profit of $27.5B.
One study, conducted by the Institute on Taxation and Economic Policy, found that 100 profitable Fortune 500 companies paid no tax at all for at least one year during the period 2008–2015. Eight of these corporations—including General Electric. Priceline, and PG&E—incurred a federal tax burden below zero.
Offshore Tax Havens
Another way corporations can reduce or avoid their U.S. tax obligation is by funneling assets through subsidiary entities—moving income off the books of the principal entity. On any given day, it is believed that U.S. corporations shelter $2.1 trillion in offshore tax havens, significantly reducing the amount they owe in tax.
Do Some Industries Fair Better than Others?
The majority of corporations that were able to significantly lower or eliminate their tax burden during the period 2008–2015 were in the energy industry. Utilities, for example, paid an industry average of just over 3.1% for the period, while other industries paid significantly more (the healthcare and retail industries paid more than 30% each).
Here are some of the biggest winners in the zero-tax game:
- Wells Fargo
- JP Morgan Chase
- Exxon Mobil
- General Electric
With many large players paying little or nothing in federal income tax, the main concern is that the overall national tax burden will be shifted onto private individuals.
Tax Questions?—Work with a Pro
When it comes to navigating the landscape of your personal or corporate tax landscape, don’t leave anything to chance. Our tax professionals are ready and eager to help. Our tax preparers, CPAs, enrolled agents, and attorneys can help transform confusion into clarity, while helping to ensure that you pay only the tax you owe—not a penny more.
Have questions? Contact us at Moscowitz LLP today!