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In February, we noted that Facebook® will get huge federal and state income tax refunds and pay no tax for years to come because of an absurd tax break related to the stock options it granted to employees.

When employees exercise their stock options, they pay income tax on the difference between what they paid for the stock (its exercise price) and its fair market value (what it’s trading for). The employer, meanwhile, gets a tax deduction equal to the amount of that difference their employees report – even though the employer isn’t actually out any cash.

This week we have a vivid example of why this deduction makes no sense, and why Senator Carl Levin wants to see this loophole closed, too.

In February, Facebook estimated its tax deduction for the stock options it gave its employees to be $7.5 billion, based on the price of its soon-to-be publicly offered shares. But with its IPO price going up and up, the company has revised its estimated tax deduction. In documents filed with the SEC on May 15, Facebook now estimates the employee stock options that will be exercised in connection with the IPO will result in tax deductions for the company of $16 billion – more than twice their initial estimate!  This massive deduction will cost the federal and state governments about $6.4 billion in lost tax revenue.

The stock option loophole overall will cost the US treasury and taxpayers $25 billion over the next ten years. Surely there’s a better use of that money than making Mark Zuckerberg richer.

Photo of Facebook Logo via Dull Hunk Creative Commons Attribution License 2.0