“Sen. Carl Levin (D-Mich.) today held up Facebook and its founder, Mark Zuckerberg, as examples of both ‘a remarkable American business success story,’ and an ‘unjustified corporate loophole’ for stock options that he’s been crusading to close for years,” Janet Novack reports for Forbes. “In a speech on the Senate floor, Levin walked through the extraordinary use of that tax break disclosed in Facebook’s initial public offering, and concluded: ‘I emphasize that Facebook’s actions are within the law. As with so much of our tax code, it’s not the law-breaking that shocks the conscience, it’s the stuff that’s perfectly legal.'”
“As previously reported, Facebook’s IPO disclosed that Zuckerberg has been granted an option to purchase 120 million shares for just 6 cents a share. Financial Accounting Standards Board rules that took effect in 2005 allow Facebook, when it reports it earnings to the SEC and future public shareholders, to count the cost of those options as just 6 cents—or a total of just $7 million,” Novack reports. “But according to tax rules that have been in place for decades, on its tax return Facebook can deduct as a compensation expense the amount Zuckerberg realizes when he exercises his options—an amount that would be nearly $5 billion if he exercises all his options at $40 a share.”
“Levin is chairman of the Permanent Subcommittee on Investigations, which held a hearing in 2007 focusing on the option related tax deductions (in excess of SEC reported expenses) claimed by nine corporations, including Apple,” Novack reports. “Of course, tax geeks might point out that while Facebook can claim a huge tax break for compensation, employees exercising those options will be taxed on the value of that compensation. (In other words, even though there’s a huge gap between SEC and tax accounting, there is at least a balance between Facebook’s deduction and its lucky workers’ reported income.) Moreover, employees’ income on exercise of this type of ‘non qualified’ stock option (as opposed to ‘qualified’ or incentive stock options) is taxed just like ordinary wages —- subject to a current top federal rate of 35%; a Medicare tax (including both the employer’s and employee’s side of that tax) of 3.9%; and a top California tax rate (in Zuckerberg’s case) of 10.3%.”
Read more in the full article here.
[Thanks to MacDailyNews readers too numerous to mention individually for the heads up.]