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Very clever, Jeff Bezos.
- Amazon used a powerful weapon to ultimately pay no US federal income taxes in 2018 and 2017. It even claimed multi-million dollar rebates from the Internal Revenue Service.
- The weapon - parceling out billions of dollars of stock options to executives and key employees in earlier years - came with a hefty tax perk down the road - a $1.6 billion US deduction last year.
- Amazon reaped a similar benefit in 2017 - a $1.3 billion deduction. As Amazon's stock price skyrockets and employees cash in, the company can reap a bigger and bigger tax windfall.
- Worth about $877 billion and run by chief executive Jeff Bezos, one of the world's richest people, the e-commerce giant didn't need Trump's historic tax cuts to notch $10 billion in net income last year while slashing its US federal rate to negative 1 percent.
- The Institute on Taxation and Economic Policy reported on Dec. 10 that in 2018, the 25 largest U.S. companies used the move to shave $9 billion off their corporate tax bills.
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"Every step of Amazon's growth has been fueled by tax avoidance," says Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a left-leaning think tank.
Tax avoidance might sound bad. Really, it means being able to navigate the US tax code like a pro so you can take every legal advantage possible to reduce or eliminate taxes altogether.
Few companies appear to do this as well as Amazon.
Gardner, a staunch critic of multinational corporations that pay shockingly-low tax bills, points to the fact that the holiday shoppers now swarming Amazon.com paid more in federal income tax in each of the last two years than the online retail behemoth did.
Holiday shoppers now swarming Amazon.com paid more in federal income tax in each of the last two years than the online retail behemoth did.
Ironically, those very shoppers are largely the reason.
The more stuff that consumers buy through the world's largest e-commerce store (its annual revenues have grown in the double digits since 2005), the more income it has that could carry unwanted tax bills. But there are some clever ways to shield that income from taxes. And a primary buffer that Amazon has used centers upon doling out grants of stock options to insiders. "It's definitely a weapon," Gardner tells Business Insider.
The move, perfectly legal, helps explain why Amazon's true US federal income tax rate was -1% last year, and -2.5% in 2017, according to one calculation you won't find in its securities filings. (A negative tax rate means that the company was able to 1) use deductions and credits that outweigh what it did send to the IRS, and 2) claim a refund from the IRS - $129 million for 2018, and $137 million for 2017, to be precise.)
Under long-standing IRS rules that pre-date President Donald Trump's 2017 tax code overhaul, companies can deduct as a business expense the value of stock options that they award to employees. These deductions are taken out of the net income that can be taxed, and therefore help lower the overall taxes a company owes.
The zinger: the size of the deduction isn't tied to the lower price at which the options are typically awarded by the company. Instead, it's tied to the usually higher price at which the options are later exercised by their lucky owner.
In other words: the higher Amazon's stock price soars, the bigger the federal tax deduction for previously awarded options become.
ITEP reported on Dec. 10 that in 2018, the 25 largest U.S. companies used the move to shave $9 billion off their corporate tax bills.
A negative tax rate doesn't mean you didn't pay any taxes - it just means that you got back more than you paid
Companies give investors a dizzying array of widely-varying tax numbers - think "income tax expense," "income tax payable," "deferred income tax balances," "provision for income taxes," "cash paid for income taxes, net of refunds" and "current taxes," to name a few.
And because companies keep two sets of books - one following financial accounting rules for regulators, the other following tax accounting rules for the IRS - those wonky tax numbers in securities filings rarely translate into what a company actually hands over to Uncle Sam on its federal return.
In 2017, companies began accounting for the value of deductions for stock awards, after the Financial Accounting Standards Board, the nonprofit entity that sets financial reporting standards, told them to do so. That makes it a bit easier to figure out what a company actually pays in US tax.
ITEP's Gardner said the best method involves dividing the number that a company reports to securities regulators and investors as current US federal taxes by the number that results from subtracting current state taxes from US pre-tax income.
That's how he calculated Amazon's -1% US tax rate for 2018 and -2.5% for 2017.
The method gets a thumb's up from independent tax and accounting expert Robert Willens in New York. It's "the best possible proxy for actual federal taxes paid," he told Business Insider.
The federal tax rate does not reflect state and local taxes that Amazon may have paid, or things like payroll taxes that Amazon has to pay for each of its employees.
Stock awards are a twofer
If you're a company like Amazon, whose shares have risen nearly six-fold over the last five years, making generous stock awards is the gift that keeps on giving when it comes to paying federal taxes.
Employees and executives get a nice present (they pay either the short-term capital gains rates or their ordinary income tax rates on their exercised shares, depending on their type.) And when they cash in their options down the road, their company reaps a windfall - a large corporate tax deduction.
Amazon reported a $1.6 billion deduction last year for stock awards it made in earlier years, after a $1.3 billion deduction in 2017, according to its most recent annual report. It's not immediately known when Amazon granted the awards, or why so many options were cashed in by their recipients over the past two years.
Amazon has harnessed "this significant benefit to significantly lower their US tax expense," Frank Vari, an independent tax and accounting expert in Boston, told Business Insider.
Amazon also used other levers that helped wipe out its tax bill last year. One consisted of $1.7 billion in deductions tied to federal tax credits, primarily for its past spending on research and development. (The credits were carried forward from prior years when Amazon didn't have enough taxable income to fully use them.)
While that amount is slightly larger than its $1.6 billion deduction for share-based compensation, it's a routine deduction for any growing company that's plowing money back into growth. And while things like research and development can be used to lower tax bills in the future, the size of the deduction is cemented based on how much the company actually spent on the expense.
But the size of the deduction for stock awards, known as "excess tax benefits" from stock-based compensation, can be determined only years down the road, and the timing depends on when exactly execs take advantage of the options. It's like planting the seeds of a tree that suddenly blossoms with lovely, lucrative tax breaks.
Amazon also took a $627 million federal deduction in 2018 that was tied to prior operating losses that it uses to offset its future taxable income, according to its most recent annual report. Those losses materialized when its deductions outstripped its taxable income in previous years.
But it's the tax boost of doling out stock awards that Amazon credits first in its most recent annual report. "We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized to reduce our U.S. taxable income," it said.
Asked about its deduction for stock-based compensation, a spokeswoman for Amazon said in an email that "Amazon pays all the taxes we are required to pay in the U.S. and every country where we operate, including paying $2.6 billion in corporate tax and reporting $3.4 billion in tax expense over the last three years. Corporate tax is based on profits, not revenues, and our profits remain modest given retail is a highly competitive, low-margin business and our continued heavy investment."
