Bloomberg is reporting that Facebook has managed to earn a billion-dollar profit for 2012 and expect a tax refund of $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 treated the same as cash compensation to the executives.
As Bloomberg notes in Business Week, Facebook’s report to shareholders refers to a US$559m liability for federal taxes.
In the footnotes do alert readers of financials find out that the liability is offset by a $1.03 billion “excess tax benefit” for the stock options.
Its 2012 tax “liability” turned out to include refunds of US$451m for prior taxes paid.
Facebook also plans to carry forward another US$2.17 billion in “net operating losses” that should keep its tax bill humming along nicely at zero in the future.
So in total Facebook’s current and future tax reductions from the stock options exercised in connection with its IPO will total $3.2 billion.
Let’s repeat the tax “loophole” that may critics may attack: Companies like Facebook are allowed to treat the cost of non-cash compensation, such as stock options, as an expense that reduces profits, essentially the way they treat cash compensation such as salaries.
The difference is that Facebook—unlike, say, General Motors (GM)—relies heavily on stock options and restricted stock units as a form of compensation. It paid out a lot during its years as a private company that it must now recognize on its income statement and balance sheet.
You won’t find any $429 million tax refund in Facebook’s financial statements. Indeed, the company says it had a $559 million federal tax liability in 2012. But that liability isn’t an actual payment. In a footnote, the company also said that it had a $1.03 billion “excess tax benefit” last year related to “stock option exercises and other equity awards.” That benefit is what flips the federal tax liability into a refund.
The Global Dispatch: Facebook earns billions in profit for 2012, set to receive $429 million tax refund