There are a fair amount of stories about how Fortune 500 companies avoid paying income tax, some effectively ending up paying no taxes at all despite making billions. This seems especially galling when companies like Amazon made money hand over fist last year but didn’t pay a fair tax rate on those earnings.
Is that money they “avoided” paying not recoverable? Does the IRS ever investigate to see if they’re doing anything illegal or just shrug it off as ‘eh, loopholes, what are you going to do?’
So long as they’re avoiding those taxes in a legal manner it’s not something you can recover. You’d have to change the laws/tax codes so they don’t have a means to avoid taxes in that manner in the future.
Amazon has largely avoided taxes by not actually making a net profit; reinvests its profits into development of the various businesses under the Amazon umbrella. On one hand, a microeconomics would point out the benefit of this, that although Amazon doesn’t pay corporate taxes itself, the degree to which it increases commerce means that there is more exchange, more sales tax (or in Europe, more Value Added Taxes), producers paying more taxes from their profits, et cetera. In other terms, Amazon is acting as a profit-neutral middleman that stimulates economic growth.
The problem with this are the ignored externalities; specifically, that while Amazon may facilitate online sales, it also undermines traditional “brick & mortar” businesses that pay local property and business taxes; it allows people to actually avoid paying sales tax (which it only started collecting on sales a few years ago; before that it depended on customers to report and pay local and state taxes on their purchases voluntarily), and of course any other costs and economic damages done by the business.
Other big companies avoid taxation by technically moving their businesses registration to states or countries that have low or no corporate taxes, even if they still do business in places that do. Apple, for instance, famously registered its distribution headquarters in Ireland and moved a lot of its revenue through there even though it has never had any significant business operations in the country and was in the process of building a fancy new campus in Cupertino. Although it was galling that such a high profile company (and one with incredibly high profitability) would go though such a ruse, it was hardly a unique business strategy as companies have been doing this for decades to avoid paying taxes or complying with other regulations. The reason the Jones Act is so onerous is because aside from ferries there are almost no commercial maritime carriers that are actually registered under the US flag.
The answer to the question of the o.p., yes, that theoretical tax revenue is essentially unrecoverable.
There’s this provision in our tax code that applies to all corporate tax payers, called net operating loss (NOL) carryforwards. If you generate losses and have no prior years that you have paid taxes that you can carryback the losses to, then you can carryforward your losses into future years and offset those losses against the income that your generate in those future years. Millions of companies utilize this feature that has been in our tax code for decades. It was introduced in 1918, and has been utilized off and on for decades.
If you don’t recall, Amazon generated NOL’s annually for the first 15 years or so that it was in existence. Many investors never understood why it was so highly valued when it made no money. So only recently (in the last few years) has Amazon begun generating profits. As such they have billions of NOL’s that they can carryforward to offset income that they generate. At some point they will utilize those NOL’s or they will expire and Amazon will begin paying tax. No reason to change the tax code just for them.
Reinvesting income does not per se avoid taxes. If you have a profit you pay taxes. What reinvestment does is gives you an asset you can depreciate as an expense.
There’s a whole section in Accounting 101 on operating costs vs. investment (capital) costs which create assets which can then be depreciated by year. IANAA but as I gather, if you buy a truck which will be used for 5 years, you can write off, say, 20% of that amount invested every year. But, if you reinvest every year’s profits, over the years you have an accumulated depreciation amount that could match annual profit.
Apple has another dodge too - if the entity that owns all the local country Apple corporations is the big kahuna in Ireland, then say it “owns” the intellectual property of the iOS programming. Every phone built and sold by local subsidiaries needs to pay the license fee to the Irish head office - so when you spend $Y on an iPhone, a fraction of that is “cost of embedded iOS” paid up the ladder, which means the local Apple USA subsidiary makes a smaller profit, and Apple head office lives in a country with a lower tax rate or different rules on how to count reinvestment and cost of doing business. Ditto for the design of the phone, the chips, etc.
I would presume if Apple owns their own shipping contractor (do they?) it would charge local companies for the cost of shipping from China, and the profit it makes doing that is attributed to whatever company the contractor subsidiary is registered in.
IIRC Trump Sr. used a dodge like this to enrich Donald and his siblings, by funneling his apartment maintenance through separate companies that simply marked up whatever the buildings needed - thus reducing the taxes on the landlord company, while the Trump siblings as the owners of those companies received dividends; thus avoiding gift tax, or income tax as employees of Trump Inc., and as I gather dividends pay less tax than income. There were suggestions in the articles that this was not kosher, but possibly because they were purported “independent” companies not subsidiaries.
Ultimately, if a company pays dividends, then the recipients declare those dividends as income and pay income tax. Allegedly.
Amazon is structured to not report profit; the “reinvestment” is part of its operating expenses. This is not a secret; the “unprofitability” model of Amazon has been discussed for a couple of decades and hasn’t prevented Amazon from being valued in the tens of billions of dollars and giving Jeff Bezos one of the highest personal fortunes in the world.
Obviously if it doesn’t show a profit it’s not taxed. But only some reinvestment expenses are expenses for tax purposes. R&D usually is. Real property almost never is. All those warehouses and shipping centers they built or bought must be depreciated and not expensed. I’m not sure I’m disagreedng with you. But expense means something specific in terms of operating profit.
Another point. If, say, Bezos, has $200 Billion in unrealized capital gains, he doesn’t sell any when he needs to buy or build a space ship. Instead, he uses them as collateral to borrow money on which he pays tax-deductible interest, and never actually pays off the loans. At some future time, he dies and his heirs inherit his shares with their value now stepped up to their current value. His estate does pay estate taxes, but all those capital gains are never taxed.
In Canada, BTW, those gains are consider realized at death and capital gains tax paid with the deceased’s final taxes. On the other hand, there are no estate taxes here.
An explanation, The Big Short-style, from one our greatest living actors.
Corporations play these games, too; in fact, they can do even better by pretending to be more burdened than they are, taking profits offshore, and compensating executives with unrealized stock options. In fact, they can even do better, achieving negative effective tax rates and getting hundreds of millions of dollars back from the government in tax rebates. For instance, Duke Energy, and energy services conglomerate which is currently building for itself a new 40 floor, 1 million square foot, $675 million new headquarters, got a $281M tax rebate on $826M of reported pre-tax income in 2020.
If that isn’t the very definition of kleptocracy, I don’t know what is.
Stranger
Note that the lender pays income tax on the interest that he pays.
And you’re partly conflating personal and business holdings here. I’m not sure that the interest on a personal loan to him against his stock holdings is tax-deductible. He’s not buying a spaceship, Blue Origin is. He’d be making a loan or a capital contribution to Blue Origin, and I don’t think a loan for those purposes is deductible.
It depends upon how things are structures. If the shares are used as collateral then they are still security against paying back the loans, the loans themselves are liabilities of the estate. If the estate has no money and the shares are actually held in a trust transferred to his descendants, the loan holder can sue the trust and the trustee, but if the trust is itself the loan holder then it can just dismiss the obligation as being unrecoverable.
Congress has systematically underfunded the IRS for decades. Doing an audit of a trillion dollar company is a massive, possibly years-long undertaking that ties up dozens, maybe hundreds of staffers, all fighting against lawyers and accountants who make an order of magnitude more than they do.
I’ve seen various estimates for how many dollars each dollar of investment in the IRS would return. A five dollar return per dollar would be a reasonable number. That’s just collecting legally owed taxes, without even getting into the complicated issues of tax avoidance. But the general response of the American people is hysteria with regard to any improvement in the IRS. To be fair, there are loads of known abuses by the IRS that should give anyone pause.
Even so, one would think that tax the rich would be a winnable slogan and tax the billionaires even better. It was tried this year and got nowhere. That’s incomprehensible to me. Until that attitude changes, no corporation is going to be held to account for the complexity of their tax returns.
IIRC, isn’t forgiving a loan to some entity considered income for that entity? If I loan you $50M and then forgive the loan, I have given you $50M in income and the IRS wants its share.
(It was in Canada, but a sad insidious version of that - one of the Canadian S&L equivalents required “buy-in” by its higher executives back in the late 1980’s. They had to own a certain number of shares so that they’d have skin in the game. If they did not have the money -most didn’t - they were loaned the money to buy shares by the employer. Then the employer went belly up and had to reorganize. The employer could not forgive the loans, or the employees would have to recognize the forgiven loan as income equal to several years of regular income and pay taxes on it. Ditto if the employer bought back the shares above fair market value. IIRC their capital losses on the shares could only be counted against any future capital gains… )
This is a complicated question that depends both on how you define “avoided” taxes and your assumptions about what changes we can make to recover it. To use one extreme, if we rewrite the constitution from scratch, we could recover most of it. Or all of it, even if we have to recover it from people other than the corporations that earned the funds. Maybe we could seize it from the company’s owners. But somehow, I don’t think that’s the answer you were looking for.
In some instances, the taxes that are avoided are really just deferred indefinitely. For example, U.S. corporations shelter earnings in offshore subsidiaries that are located in tax havens. But, those subsidiaries continue to hold the profits. We could change the tax laws to capture at least some of these deferred taxes.
For example, there are proposals to give corporations a tax break if they will repatriate earnings to the U.S. So that is one way we can recapture some tax revenue on avoided taxes. Perhaps, if the political will were such, we could even try to tax those accumulated offshore earnings without the companies necessarily repatriating them but this would possibly cause more problems than it would solve.
Part of the problem with trying to impose onerous taxes on corporations is that it will likely lead to unintended consequences that are worse for America. Let’s use Apple as an example. It has shifted its earnings overseas. America could pass a law that said any corporation that operates in America, directly or through a subsidiary, must pay taxes in America on all of its earnings, no matter where they are earned. This would mean Apple’s tax dodge wouldn’t work anymore. But, it would be an enforcement nightmare because America lacks the authority to audit or examine for compliance in other countries. The IRS can’t just show up in Switzerland and demand access to companies’ books because they have a store selling watches in Times Square. Additionally, it would lead to terrible consequences. Lots of foreign companies operate in America. Nissan, Honda, Toyota, Mercedes, and BMW all have US assembly plants in the US. If we started taxing them on global profits solely because they have US operations, the companies’ solution to those taxes would be to close down those US operations.
So, we need a tax system that allows us to attract investment while also generating sufficient tax revenue to fund government operations. This is not easy.
In fact, Amazon has had NOLs that were scheduled in each of the last couple of years, and more that will expire this year. I have not seen any indication that they have failed to use these NOLs so I am certain they will beat the bushes this year and generate at least enough profit to use up the expiring NOLs.
There are tax strategies that pretty well assure that his estate may never pay estate taxes either. Bezo’s estate might be too big for even some of these strategies to work fully but with a relatively young guy and a long time to run, they can keep billions upon billions from ever being subject to estate tax. Some of those strategies require giving some at least tiny portion of the money to charity. For a while, Bezos was known for giving tiny amounts to charity, perhaps as part of an estate tax strategy, but he has stepped up his game recently. I’m sure he’s still benefiting from the estate tax benefit of his gifts but my guess is he is giving more than would be strictly necessary to minimize his estate tax burden.
Borrowing money to invest, even in a vanity rocket company, is generally tax deductible as investment interest expense.
Buying a rocket to just fly around in is just personal consumption, and interest for personal consumption isn’t generally deductible (just like you can’t generally deduct your credit card interest). In another thread, I speculated about a tax strategy that would make borrowing against stock even for personal consumption deductible but I’m less than entirely sure it would work. I also made a hash of the explanation so I won’t link to it here.
I don’t think it matters because banks aren’t lending out billions of dollars that will be unrecoverable when Jeff Bezos dies. The loans would be secured by the shares of stock. I can’t quite follow Stranger’s hypothetical.
It’s true that the forgiven loan would be income to the employees but I suspect that wasn’t the real reason the loans weren’t forgiven. The loans were assets on the books of the company. In bankruptcy, those assets are to be used to satisfy the company’s obligations to its creditors. Companies that are insolvent can’t just start giving their assets away rather than repaying their debts.
Transfers of assets (which would include releasing a debt) can’t be done by an insolvent company if the transfer is made, among other cases, without giving reasonably equivalent value (that is, without the borrower repaying the loan) or if the transfer is made to an insider. These are considered fraudulent transfers. Fraudulent transfers can be undone by bankruptcy courts.