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back to article Facebook turns billion-dollar profit into tax refund

Bloomberg is reporting that Facebook has managed to parlay a billion-dollar profit for 2012 into a tax refund of US$429 million. According to an analysis by Citizens for Tax Justice, The Social NetworkTM got its tax break through deductions for the cost of executive stock options and share awards. For tax purposes, these are …

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Unhappy

Naive & sentimental comment -

- and I do know better, but isn't it time this kind of financial jiggery-pokery was halted? After learning that the Gov. have raised the US debt ceiling (again), surely there must be someone of rank in the House with an ounce of fiduciary sense - or have they all been bought & paid for now?

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Anonymous Coward

Re: Naive & sentimental comment -

Join the revolution against all this injustice. You can be the rank of "Average Joe", one of the ranks of the "It is better to be pissed off than pissed on" group. I'll be the one standing right next to you.

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Re: Naive & sentimental comment -

There has to be some common sense, tax needs to be paid (and fair enough, not wasted either and its fair to debate how big government should be) but the current situation of politicians being for hire and companies being able to worm their way out of tax is just not one. I paid about 42% of my wage in direct federal and state tax this year. I got no break for school fees, I barely get a break for the nearly $30k in medical insurance premiums. I am sick and tired of being seen as a bottomless pit of money to be raided by either party. Enough money to have to pay tax, not enough to hide it and avoid tax. Screw AMT we need alternative maximum tax. This is supposed to be a democracy, not buy your way to a cheaper tax bill. We should all pay whats fair, but fair doesn't come into it for companies, they're selfish ****s but which politician is going to do anything about it and risk no funding for their next election.

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42% of wage in direct federal and state tax

Rampant Spaniel, I’m curious to know which taxes you’ve included to arrive at your 42% total. I presume that you’ve included federal and state income taxes (using the rates of the corresponding tax brackets, not using only the rate of your highest tax bracket), as well as Federal FICA taxes (viz Social Security and Medicare). Are you including other taxes in addition to those, e.g. state sales taxes, state property taxes, &c.?

If you itemize your deductions on your federal tax return, then the medical insurance premiums that you pay above 7.5% of your gross income are deductible. Is your annual salary high enough that nearly $30,000 in out-of-pocket medical insurance premiums barely exceeds that 7.5% threshold?

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Re: 42% of wage in direct federal and state tax

Federal, state, social security, sui \ sdi, property and medicare (and additional medicare, can't forget that). I didn't include the sales tax, gas tax etc. I didn't add the total top brackets together, just looked at total projected payment for 2013. I could be out by a percent or two but I sure ain't getting no huge ass refund! If you are doing the maths figure in self employed as well, go see what that does to 12.?% for the first 110k ish alone.

As for the 7.5%, I wish :) but no, remember that its the difference between the 7.5 and the amount paid against the 'free' itemisation, not the whole lot and school fees you get no allowance for.

I don't mind the concept of paying tax nor paying my fair share. I just dislike it either being wasted or other people getting out of paying their share by using bistromath.

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Anonymous Coward

So

Facebook is now supported by the tax payer. Reminds me of Starbucks here, they make no profit and post losses yet continue to open new shops.

There is something fundamentally wrong with this yet Governments don't seem want to get to grips with it?

Could it be that politicians have too much of a financial interest in this?

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Anonymous Coward

I got a tax refund of £82.32 on the same day the revenue phoned me and demanded I pay £111.27 for an under payment!

But hey, I'm just one of the little people.

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Anonymous Coward

Re: Naive & sentimental comment -

I'm no fan of bigcorp, and certainly no fan of Zuck and his farcebook. But I am a fan of enterprise and there is a very good reason that most tax jurisdictions allow businesses to CARRY FORWARD their past losses to offset against future gains.

You remember all that money that was invested in building up a massive scale operation before there was any revenue model, let alone any profits, right? All those losses that were incurred?

If an already very profitable business, let's say elGoog, had developed farcebook then they would have benefited from the immediate reduction in their taxable profits. If one were to deny that same tax benefit to startups, purely because they don't already have existing profits to offset, we would immediately stifle almost all investment in new enterprise.

Clearly, we should respect the investment that people made in farcebook during its early days and permit those accrued losses to offset current profit. Which is exactly what has happened here.

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Facepalm

Re: Naive & sentimental comment -

@AC 13:14 - I agree that there's a valid reason for companies to be able to carry forward losses, exactly as you mention since they can be incurring heavy initial losses for initial investment. But this is NOT the case here, the imaginary losses are being generated by executive pay. Double whammy on the taxpyer and the little guy, because the tax refund isn't going to fund infrasructure, engineer's pay, software improvements or (dare I say it) increased privacy for users (which could be justifiable for the reasons above). It's going straight out of the taxpayer's pockets and into that of FBs top executives... who are exactly those in the position to give themselves these mega-bonuses knowing full well that they'll get teh money back from the taxpayer.

Something very wrong in any tax code / accounting code that allows this to happen. is it that difficult to exclude giant executive bonuses from the ordinary salaries in a company P&L??

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Unhappy

Re: Naive & sentimental comment -

Well it seems the problem is that the Govt's own watchdogs just want to look the other way.

I think what has happened is that a lot of people have been 'gotten to' by the banks and the big corporations.

Take a look at the faces of the regulator lawyers in the US when grilled and asked some straight questions.

http://www.upworthy.com/elizabeth-warren-asks-the-most-obvious-question-ever-and-stumps-a-bunch-of-bank

You can almost see the look of "god don't let her ask about the brown envelopes!"

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Re: 42% of wage in direct federal and state tax

Rampant Spaniel, self-employment adds an additional 6.2% of FICA (Social Security) to the first 110k-ish and an additional 1.45% of FICA (Medicare) on all income. Regarding the 7.5% threshold, you (and I, and all other US taxpayers who don’t have their own personal accountant on beck and call) get our breaks either through the standard (non-itemized) deduction — that “‘free’ itemisation” — or through itemizing the deductions. Being discontent with one’s itemized deductions barely exceeding the standard deduction is a far cry from “barely getting a break” at all.

In your particular circumstances, you might benefit by changing your self-employment to becoming an employee of your own C corporation. For a C corporation, medical expenses paid on an employee’s behalf are completely tax-deductible (as long as every employee of the corporation receives the same medical expense benefit), so there is no 7.5% threshold to be met, as there is on an individual’s tax return. School fees paid on your behalf by the C corporation would also be deductible if the area of study is related to the work that you do for the corporation. By setting your salary at its current level, less the employer’s 7.65% FICA and less your medical expenses, and possibly less your school fees (all of which you currently pay out-of-pocket, but would then be paid by the C corporation), you would still be able to take the standard deduction on your individual tax return, and your lower salary would result in a reduced tax liability; not a “huge ass” difference on the scale of Double-Dutch/Irish Sandwich pokery-jiggery, but perhaps enough to make it worth a look. Taking this approach would be offset somewhat by the larger amount of paperwork that C corporations need to produce (e.g. filing quarterly FICA tax returns as well as annual corporate income tax returns, which can be considerably more complex than those that individuals file), so make sure that the cost/benefit tradeoffs make sense for your situation.

I don’t think that many people do like tax money being wasted. Fairness being in the eyes of the beholder, there are a few hundred pairs of eyes in Congress that need to have their eyes opened; but as long as US voters return the same people to the same positions of power, bistromath will remain the law of the land.

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Re: 42% of wage in direct federal and state tax

Thank you for the advice. I had been considering something similar but decided not to just yet for a couple of reasons, 1 being that frankly its hard to say others should stop avoiding tax when I would be doing something similar and 2 I like to keep things relatively simple. My work grew significantly over time and I guess I got stuck in my current situation although it is possibly the least 'efficient' method for tax.

I am ok with paying tax, I use the services it pays for so its fair I pay tax. The problem is with companies and people who are selfish and would be happy to reap the benefits without paying anything. To be fair the tax doesn't leave my kids starving, I can afford it and I don't believe people should be asked to pay more than they can afford to pay. I do think we have a big decision to make in our close future about education and healthcare. There is no point paying for it to be done badly. Either tax the amount of tax needed to do it properly or don't take anything. Personally I would love for a great state education system like I grew up with but that isn't happening here. I would be ok with paying an extra couple of percent state tax for better policing and education. Paying for a system that doesn't work is worse than no system at all.

Couldn't agree more with your last paragraph. The fault ultimately lies with voters. We are getting what we deserve, just like those folks expecting cheap ass lasagna not to be made or horse (hell they were lucky it was horse, I expected rat, and not the nice bits of rat).

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Paris Hilton

Not as scandalous as it may seem

Stock options have a cost for the company, even if only an opportunity cost, so it's just a question of Facebook transferring a tax burden from itself to those executives, like Zuckerberg's reported $1B+ tax bill.

Those executives will most likely be paying at a lower 15% or 20% tax rate as stock options held over 2 years have favorable tax rates, similar to dividends or capital gains, that working schmucks don't get to use.

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Unhappy

Billion dollar profit ?

A Billion dollars of profit equates to 20 Million per week.

Obiously there are the usual overheads : salaries, services, providers, equipment etc.

Lets say just for argument that FB are making a 50% profit, which is probably vastly exagerated.

That means that this company, that sells nothing but your information and personal details has a "weekly" revenue of 40 Mllions Dollars.

Why does this make me feel so ill ?

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Re: Billion dollar profit ?

Well, no. This is just the cash splurge from their IPO. This is probably the last time in their history they'll ever book a significant profit.

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Thumb Up

Re: Billion dollar profit ?

"Why does this make me feel so ill ?"

Basically it's because it is commercial leanings having it's way with just about everything. Good if you happen to be on the recieving end...

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Re: Billion dollar profit ?

"This is probably the last time in their history they'll ever book a significant profit"

How do you figure that? Google are doing nicely and their ads are delivered almost randomly so Facebook with their very targeted adverts should do at least as well as Google if not better. Have you even looked into Facebook advertising? I did, and found that I could target people within my own town with specific interests in a specific age range which ended up being under 200 people. This makes the value of that advert significantly higher because those people already want what you're offering if you understand your target market. Try adding a hobby to your profile and within 24 hours you'll have new adverts. Change your status from married to single and you'll get new ads again, and the ones you see are based on a highest bid process at the back end. I think rather than being their last profit, this will be their last low number profit because the ad engine is a stroke of genius.

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I can't fault Farcebook for following the rules

but maybe we need to amend the book a little?

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Re: I can't fault Farcebook for following the rules

Yes you can fault someone for following the rules. What is legal and what is right are not necessarily the same thing.

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Devil

Muahaha!

Well, lawmakers do tie themselves into convoluted pretzels to simultaneously milk the cow without actually appearing to do so (if need be the "be social" label is applied to destructive policies) while giving nice rebates and deals to politically well-connected operators or just to influence decision making by private and corporate entities.

Someone on the other side of the board actually playing the game instead of playing the victim is thus very much ok.

On the other hand...

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Anonymous Coward

I deleted my Facebook account

Just saying.

When you see how many hoops you need to jump through to get it deleted and all the trickery trying to get you to not delete it you will see the true face of Facebook.

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Re: I deleted my Facebook account

There should be hoops if it's irreversible. Otherwise someone with access to your account could easily delete it.

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Corollary

Given that it is Register policy to repeat the cant that "companies don't pay taxes" does it follow that companies don't get tax refunds as well?

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WTF?

Re: Corollary

While this seems to be a common concept from the commantards, I don't think I have seen much of an editorial policy around it. I have only seen that put into print ONCE in an article.

One piece is hardly editorial policy to repeat.

(I miss the elReg gravestone. I used to love to use it ironically when defending our favorite rag)

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Erm

As above, options grants are a cost to the company. They're also income to the recipients. All that has happened here is that the tax is being taken off the recipients of the options grants rather than the company accounts themselves.

Think of itthis way. If the company had not used stock grants but instead had raised everyone's wages then we'd see exactly the same thing happening. The company makes a loss and the people getting the high pay pay lots of tax.

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Mushroom

Corporate follies!

Only in America (maybe not...) can a corp make a huge profit and then get the government to pay them for it! This has been going on for decades. What's new is that there is no 'product.'

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New Respect for Facebook

Good for Facebook, apparently they have competent management.

Politicians write the rules, perhaps naively, but need to learn that the rules are the rules. Complex rules will always come back to bite you. You know what they say about industry standards? There is one which says anything you want it to say. Same for tax law. The solution is not more tax laws, but fewer. The problem with the flat tax is it doesn't give politicians enough knobs to turn in the form of tax breaks.

Every dollar Facebook does not pay in taxes is a dollar invested. Government doesn't invest, government spends to reward supporters.

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Devil

There are even worse situations than this. When Google bought Motorola Mobility they effectively bought over $6,000,000,000 in tax write offs up until 2019 becuase of losses made my motorola and prior research.

What this effectively means is that because of it's already tricksy tax schemes the US government is probably going to be giving rebates to Google for years! Genius!

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Stop

But...

...surely the US government was going to be giving those same rebates to Motorola anyway? And if Morotorla weren't due those rebates, Google would have paid $6,000,000,000 less for them? How exactly does the US Government lose out here? And where's the gain for Google?

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keep in mind the beneficiaries of the stock and options had to pay personal rate taxes on what they received. the tax was paid, just not twice.

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Holmes

You do know that most corproations pay the personal taxes of its BODs, right?

You DO know this?

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Tired of tax loopholes

The rich get richer!! Personally I am tired of seeing the rich corporations take advantage of tax loopholes when the global economy is basically for shit...everyone needs to pay their fair share to make things better imho.

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Bloomberg writer is clueless

Facebook can't get a deduction for U.S. federal income tax purposes until the stock options or other forms of equity compensation are reported as taxable income to the employee. This is the same thing that occurs when Facebook pays cash for wages—they report the income to the employee and they get an equal deduction on their return. What makes this more complicated and the reason why Bloomberg sensationalized it, is due to the differences between how U.S. financial reporting rules treat equity compensation and how it is treated for U.S. income tax purposes. The bottom line is that Facebook is not getting any special treatment or using a loophole for tax purposes unless deducting compensation expense in the same amount that was reported as income to the employee is a "loophole". No one was complaining when Facebook was paying taxes when they were reporting a financial statement loss. Why do people get up in arms when the timing differences between the two different methods of accounting "flip" and Facebook gets a tax refund when they report financial statement income.

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This post has been deleted by its author

Whatever about taxes...

...Facebook appear to have blown somewhere in the order of their entire profits on employee stock options.

Dividends, they've heard of them.

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Alert

Highest Corporate Tax Rate in the World!!

^ This is what is often heard from many American Randians when talking about "free markets".

Yet once again, (for the millioneth time actually) we see it for the lie it is.

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