How much will you be paying in federal income taxes this year? According to data from 2013, the average individual American tax bill was over $8,500 — yet there are large corporations making millions of dollars in profit and paying no income taxes. According to USA Today, 27 large corporations in the S&P 500 reported millions of dollars in pre-tax profit in 2015 (billions in some cases) and paid no federal taxes. Not only did they pay no federal taxes, they all received millions of dollars in refunds.
Large differentials in pre-tax profit and corresponding refunds were posted by General Motors ($7.7 billion in pre-tax profit and $1.9 billion in refunds), American Airlines ($4.6 billion in pre-tax profit and almost $3 billion in refunds), and United Continental ($4.2 billion in pre-tax profit and $3.1 billion in refunds). Telecom group Level 3 had the highest refund of the profitable companies on the list at $3.15 billion. To view the entire list of the 27 S&P 500 companies that negated their tax bills and received large refunds, click here.
Tax avoidance by major corporations is not a new phenomenon. Citizens for Tax Justice examined the issue in 2014. They found nine Fortune 500 companies that had an effective negative tax rate for the five-year period from 2010 to 2014.
How can this be? Because large companies can afford to exploit legal maneuvers and structures that help them to eliminate their tax bills.
Several of the companies on the list used valuation allowances to take advantage of losses in previous years and roll them forward to neutralize tax gains in the current year. As an individual, you can do something similar with your own capital gains and losses, but corporations have greater flexibility in the way they can apply their losses.
Level 3 used this approach by claiming a $3.2 billion tax credit based on losses from previous years and current acquisitions. Similarly, United Continental had racked up $4.7 billion in tax credits that wiped out their 2015 tax bill with plenty left over.
Other companies avoid stashes by keeping the profits from their overseas operations in the host country via reinvestment. Foreign profits are recorded in the overall profit total, but they are not subject to U.S. taxes until they are brought back into the country. Companies can opt to keep as much of their foreign profits as possible in the host country and pay that country's lower tax rate instead. Some go further by merging with a foreign company to create a tax inversion, where the headquarters of the new entity are based overseas. The company is then subject to the tax laws in that nation.
Many other tax avoidance strategies are available to Corporate America. Real Estate Investment Trusts (REITs) use pass-through accounting means that pass the tax burden through to shareholders. Accelerated depreciation can allow a company to write off capital costs rapidly compared to the life of the corresponding assets, and with proper timing, this strategy can neutralize a large tax bill. Companies can write off the value of their executive stock options or tax benefits. Targeted R&D tax breaks can reward a company for doing research they were likely to do anyway.
While these tax strategies are all legal and companies should generally attempt to reduce their tax burden for the benefit of their shareholders, it has not necessarily worked out well for profitable companies that receive large tax refunds. As of early March, shares of the companies paying no taxes averaged an 11% drop in the past year as compared to a 4.8% average decline of the entire S&P. Corporations may not be receiving the benefits that they seek, but it is hard to be sympathetic to their stock situation as you write your check to the IRS and merely dream of receiving millions of refund dollars.
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