Microsoft and Cisco Don't Pay Taxes?

Perseus_Moebius writes "Neither Cisco nor Microsoft paid a single dollar in federal taxes last year! if there was any doubt we have a federal government run by corporations this should end it. read the article on SF Gate. " Pretty scary. Apparently they get to write off stock options.

Comments

Re:Corporations shoudl not pay taxes!

[OWJones]

> So, please stop. Corporations are not people, the shareholders are and we already pay lots of taxes.

Except for the fact that the Supreme Court ruled in 1886 (Santa Clara County v. Southern Pacific RR Company) that corporations had the same legal status as people under the 14th amendment. "That's nice," you might say, "but that doesn't mean that the government should exert the same financial control over corporations as people."

Well then, why do corporations get welfare? Each year the federal government hands out more money to large companies than it does to individuals. Free market economy? It doesn't exist. No matter what fiscal libertarians may tell you (I consider myself a social libertarian, btw) it simply doesn't exist because there is no legal playing field.

So please, get your facts straight before attempting to act condescending towards your readers. Someone may know what they're talking about and make you look stupid.

Disclaimer: The above comment is not the be-all and end-all of US tax laws. If anyone has more info, feel free to correct me. Just don't spout coporate propaganda or catchphrases unless you have facts (laws, court cases, etc) to back it up.

-jdm

taxes were paid

[bbug]

the employees who exercised their options paid taxes, either through AMT, capital gains, or income tax. So, in theory, the government got something from the company's owners.

yes, it is a loophole, but it is not like the money completely disappeared.

Next thing, you'll say Nader is correct ...

[WillSeattle]

and you'd be right.

Look, the US is strongly biased in favor of corporate welfare, and tech firms are the worst offenders. Major corporations even have special loopholes written for them by Congress and the Senate, and then write off the vacations they give said members as a business expense.

Every time Bill Gates goes on a trip to China to see the Great Wall and play bridge with his buds, the entire trip is a tax write-off for Microsoft, under the guise of "doing business".

When I was a kid, corporations paid three-quarters of the income taxes. Now, people pay almost all of the income taxes. And, it's a scam for the rich, because we get to set up trusts to hide our income legally, and if you elect George Bush, we'll get an even bigger slice of the pie.

And face it, no matter how innovative you may think you are, you're quite unlikely to become a multi-millionaire. There are very few ways to do it - one is to save more than 10 percent of your income (I save 20 percent, much in tax-deferred or tax-exempt accounts, the rest in tax-efficient single stock purchases), another is to steal it (Bill G), a third is to inherit it (most inheritors waste it all, because they spend more than they save).

Re:Next thing, you'll say Nader is correct ...

[hey!]

Or are you in favor of taxing the same gains twice?

By that argument, dividend income should not be taxable.

Personally, I think stock options should be deductable, but not for the same reason you do.

There is a simple, internally consistent way of dealing with this problem that has been used since the invention of double entry bookeeping. All forms of employee compensation should be considered an expense. It is not taking this simple and logical step that puts us into the land of taxation paradox.

By not expensing this form of compensation, from an accounting standpoint its as if the employee's gain came out of thin air. Or more precisely, what is happening is that there is a transfer of wealth between the existing stockholders and the employee that takes place off the balance sheet and income statements.

The result is that an individual's stock may consistently lose value, yet the company can claim to be profitable.

So, an alternative explanation of this scenario is that Microsoft and Cisco are not in actuality profitable companies, because they're pissing away stockholder value on stock options.

The obvious question is how can they can grow if they are not profitable. I think the question deserves to be stood on its head. It's actually easier to hide losses during high growth; I once worked in a company that lost money five years strait but grew at an enormous rate. That's why accounting was invented -- to give a truer picture of a company's value. Taking options off the books means that they aren't factored into the question of whether the company is really fundamentally sound. It makes the company look better on paper than it should; combine this with a general atmosphere of growth in the IT sector and it allows management to sweep losses under the rug or to turn lackluster profitability into stronger profitability.

Not expensing options is a kind of pyramid scheme -- the illusion of greater profitability buoys the stock prices until some future generation of stockholders ends up holding the bag.

"Fairness" is a pretty difficult concept -- I know it when I see it is not good enough. I think a good test of fairness, at least in taxation policy, is whether or not economic incentives are distorted unnecessarily. If Microsoft could not claim profitability, you could bet they would alter the way they give out stock options. This might not be popular in Redmond, but folks who have their retirement money in MS and Cisco may be in for a rude shock.

Re:Next thing, you'll say Nader is correct ...

[weave]

Governments don't ensure your freedom.

What a load of rubbish. Without government, you'd have NO freedoms. Your existence would be defined by the one stronger than you. Government enforces the law. The law is defined by government. That can be a good thing or bad thing. In some countries where government has defined laws where its citizens have no freedoms, obviously er duh they don't.

Fortunately for many democratic countries, their governments have been set up to give its citizens freedoms which they deserve, back it up with law, and back that up with more law (common law, constitution, whatever) that says you can't take those freedoms away...

If you want lack of government meddling in your lives, I suggest you move to a country that has horrible ineffective government, like Columbia. Then your "freedoms" would be defined by the closest drug lord...

Also, guess what, government takes money to run it, and that comes from taxation. You enjoy benefits from the government like 1) protecting you 2) defining a stable currency 3) providing infrastructure. That comes with an obligation to pay for that stuff. I always love those people who whine about their taxes with the mantra "It's my money, it's my money." Er yeah, it *was* your money. Somehow if I walk into a grocery store and attempt to buy food and then cry to the cashier "You can't have my money, it's my money, I earned it." I don't think it would get me too far!

True, too much government is bad, but too little government is also bad. As everything else in life, a balance is needed.

But the idea of trusting a business more than a government is scarey. A business has only one obligation, to maximize the earnings of its owners. They couldn't care less about the customer beyond retaining them as one, and that's the way THAT should be...

Largest?

[Speare]

It is scary that the largest corporation in the United States is able to get away with not paying federal taxes while you and I, mere citizens, have to pay taxes every year.

From the article,

• Cisco Systems, the second-most valuable company in America, paid no federal income taxes for its latest fiscal year thanks to a little-known corporate tax break on employee stock options.

  Microsoft, which ranks No. 4 in market value, did not pay any federal taxes either, it seems.

Little-known, maybe to the typical man on the street, but *well known* to pretty much any tech startup or tech corporation of any size.

The tax code in the USA is more complex than the Win2000 codebase, and has twice as many bugs. I have lost any hope of a simplified tax code, because representatives cut out special tax incentives and benefits for their constituents. In essence, it's their job to make the tax code more complicated, favoring the represented people AND corporations.

Employees still pay taxes

[Mark F. Komarinski]

The employees who exercise the stock options have to pay taxes on the income from them, meaning that while Cisco the corporation didn't pay income tax, the employees paid taxes on the $7b it gave out last year.

If the figures from the article translate back to the individual employees (which they probably do), the govt. actually got $1b more than what it would have gotten if Cisco had paid taxes on their income.

I'm no fan of trickle-down economics, but which would you rather have:

1) $1b paid by Cisco, employees get zip
2) $7b in stock options "paid" out by Cisco, $2b in taxes paid to the govt. Employees wind up with $5b in their pockets.

Corporations shoudl not pay taxes!

[Prometheus_NG]

Stop and think a moment:

Every time a corporation pays taxes on income, a stockholder is taxed twice. Corporations don't make money. The people who own a corporation, i.e. stockholders, make money. Stockholders pay income taxes on corporate dividends and capital gains on appreciated equity. So, if a company has to pay taxes on income and then the shareholders pay taxes on the divendends realized from that income, it just means that the same income stream is taxed twice.

So, please stop. Corporations are not people, the shareholders are and we already pay lots of taxes.

The taxes do get paid...

[UncleRoger]

The employees who get the stock options pay taxes on their profits. It's a cost to the company. If the companies didn't get to take a deduction, it would be double taxation.

Consider this: Say you work at Lego. Because you're an employee, you can buy a Mindstorms kit for cost (say, $50) rather than the $200 list price. Should Lego have to pay taxes on the $150 profit they didn't make from you?

Similarly, if Microsoft has a bunch of stock that's worth $100/share, but they've previously agreed you could buy 1,000 shares for $10 each, they're losing $90,000. You, on the other hand, have just made $90,000. So who should pay taxes on that $90k? And since MS just gave you a portion of the company for 10% of its value, shouldn't they be able to deduct that loss?

Mind you, IANACPA...

It's not 100% a free ride...

[the_quark]

Although it is nice from a tax perspective. Here's the logic behind the way it works:

BigCo gives a Bob, an employee, stock options at $5, the current price. Bob is not taxed for this, and BigCo doesn't put the transaction on its balance sheet, because there was no real value traded. BigCo gave Bob the ability to buy shares at $5, which is what he could buy them in the market for, anyway. Hence, no income for Bob, no loss for BigCo.

Five years later, BigCo has had an enormous run-up in its stock price, and those options are now worth $50. Bob excercises his options, buying 100 shares of BigCo stock at $5 per share, or a total cost of $500. But those shares are worth $50 each, or $5000. A nice profit for Bob, to say the least; he can now sell the shares at their full market value.

According to both the IRS and standard accounting practices, this gets counted as a taxable gain for Bob (that $45 difference gets hit as income). Similarly, if BigCo had just hung onto those shares, they could've sold them themselves for $50, so BigCo gets with with a $45/share loss. A company's profit is the total revenue in minus total money lost, and that loss counts. If you end up with a total number that is negative, you don't pay taxes, since taxes are on net profits.

So, the article's contention that it becomes a "tax deduction" for the company is a bit simple - it becomes a loss for the company. This is why so many .coms like to trumpet their pro forma numbers - those usually exclude "non-cash charges" such as the non-cash loss they are forced by accounting rules to take on the hefty stock compensation they give their employees. That non-cash loss is why you can see statements like "fooco.com has lost $278 million since inception," but, if you look back through their announcements, you'll find out fooco.com has only raised $75 million. The rest is a "non-cash loss," and, frankly, given that fooco.com is losing money, anyway and not going to pay taxes for a long time, they'd probably rather just get rid of the current system. In today's media world of people looking for "dot bombs," fooco.com is likely to report a $.75/share loss (including non-cash charges) and a $.25/share pro forma loss, with analyst excpectations of a $.50/share (pro forma) loss, and have the press complain that they missed their numbers!

The fundamental logic is simple - Bob was compensated by BigCo. Bob has to pay taxes on his compensation. It doesn't make any more sense to have BigCo pay taxes on the lost money in that transaction that it would for BigCo to pay taxes on the salary it has to pay Bob.

Obviousness...

[William Tanksley]

In a sense, this article is a troll; it's very shoddily researched journalism, and extremely sensationalist. Of course tax deductions exist; I depend on those, and I would HOPE that corporations take advantage of them just like I do (and this one is even a GOOD deduction).

I've also seen and agreed with the arguments that corporate taxes are a demagogic sham in the first place; the money should be honestly taxed from individuals, so that we can keep track of how high our taxes really are, and be able to vote our outrage when appropriate.

However, there is some point in the outrage over how little corporations pay. The fundamental problem is that majorities vote, but a minority pays taxes. Fewer and fewer americans pay taxes, and they're the richest part of America. We're reaching the point again where we have taxation without representation -- but this time we're trying to do that to people who have real financial power, and IT WON'T WORK.

People with financial power have the means to work against those taxes; they start by lobbying for tons of loopholes, but pretty soon they're going to insist on being given political power proportionate to their tax burden, and pretty soon they will wield all of the political power in addition to all of their financial power.

This is assuming a complete lack of bad motives, of course. If you're the conspiracy theorist type, mix in those; you'll find that the result isn't much worse.

So we've encouraged poor people to trade their franchise tomorrow for a few dollars less in taxes today. Think about it. Does a progressive tax really sound so good now?

-Billy