No Taxes for Facebook? Senator Cries Foul

Sen. Carl Levin doesn't like corporate tax loopholes and he really doesn't like Facebook using these loopholes to cash in on big tax breaks.

The Michigan Democrat, who introduced a bill in February that aims to cut corporate tax loopholes, pointed to Facebook as the epitome of what's wrong with the corporate tax code in the United States in a speech on the Senate floor Wednesday.

According to Levin, Facebook may get a tax break of up to $3 billion through a stock option loophole, which is outlined in the company's IPO filing.

"Facebook's $3 billion tax break brings the issue into sharp focus," Levin said. "Facebook's use of this loophole is the most pointed illustration yet of the cost of this loophole."

Basically, the loophole works like this: According to the company's IPO filing, Facebook CEO Mark Zuckerberg will exercise options to buy 120 million shares at 6 cents per share. The shares are now currently estimated at the value of $40 per share or about $5 billion total, but under the current corporate tax code, Zuckerberg will be able to report to investors and regulators that the stock options cost just six cents per share. This amount will also be recorded in the company's books. However, on Facebook's tax return, the company can claim the options at the price the shares actually sell for when the company goes public and take a tax deduction on the larger amount.

"So the books show a highly profitable company, profitable in part because of the relatively small expense that the company shows on its books for the stock options that it grants to its employees," Levin said. "But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they have shown on their books."

In addition, Facebook is also legally allowed to carry back any tax loss that comes from the deduction for two years into the past and claim a tax refund for income taxes it has paid over the past two years, which the company estimates could total $500 million, Levin said. Facebook is also allowed to legally carry forward the tax losses from the tax deductions for up to 20 years, which would reduce future taxes it owes.

"Altogether, this loophole could give Facebook a tax break of up to $3 billion," Levin told the Senate. "Now, the end result is that a profitable U.S. corporation, a success story, could end up paying no taxes for years, even decades.

"Now, I emphasize that Facebook's actions are within the law, as with so much of our tax code, it's not the law-breaking that shocks the conscience, it's the stuff that is perfectly legal."

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