Site icon Blog by Quicko

How did Amazon avoid Federal Tax for 2 Years in a Row

A massive tech-giant pays zero federal taxes!

Amazon is a very sophisticated tax player. It is very much the canary in the coal mine. They’re really doing what a lot of politicians wish more companies would do.

Amazon is a huge company. But you know just how huge it really is? It is one of the only two US companies to reach over a trillion dollar valuation. No one in history has become as rich as quickly. It has a hundred million prime subscribers globally. If you put those prime subscribers in one country, it would be the fourteenth largest in the planet.

Amazon avoided Federal Tax on more than $11 billion dollars of profit in 2017, despite being such a massive company. And somehow they got a $129 Million tax rebate for the year 2018.

How did they did it?

First, There is a Tax Bill…

President Trump’s signature tax legislation lowered the corporate tax rate from 35 percent to 21 percent. Corporations were literally going wild over this. This immediately slashed Amazon’s tax burden.

Second, Amazon’s shrewd use of revenue…

Amazon plows a large portion of the revenue back into itself to cultivate long term growth. Amazon has actually been self funding for a long time now. The company challenged significant cash flow.

One of the most amazing things about Amazon is that the company does not really rest their laurels and continuously tries to innovate. It is constantly trying to heed the needs of the customer. This started in the early stages with Bezos using the strategy to get big fast. Thereby helping Amazon eclipse its once arch rival Barnes & Noble. Since then it has helped Amazon gobble up countless other retail markets as well, embark on lucrative ventures like Amazon Web Services, and even become a Hollywood studio with shows like “The Marvelous Mrs. Maisel” and “Jack Ryan.”

Amazon has invested so much revenue in itself over the years that sometimes it didn’t even make a profit. And when that happened, it could carry forward losses to write off on future tax bills. In 2018, those carry forward losses eligible for federal write off amounted to $627 million.

Third, the massive federal tax credits…

The company reports are primarily related to research and development. These include Amazon’s A.I. assisted logistics network & its research for consumer electronics products. Amazon has poured tens of billions of dollars into research and development over the years.

The above is not the only tax credit Amazon qualifies for. The major tax credits were availed from the expenses that is allowed for investments in plants, equipment, buildings and things of that sort. Trump’s Tax Cuts and Jobs Act supercharged this credit. This was a perk that Amazon cashed in on…the very idea behind expanded credit.

Fourth, industry performance…

The U.S. economy has not been as productive in the recent years. There was a solution for it. The government made plans to help companies invest more in machinery and training. Thus resulting in higher productivity.

Not everybody buys into this reasoning. The tax breaks Amazon got, they were being rewarded for what they were going to do anyway. Because when you’re a company as successful, as profitable, as cash rich as Amazon is, you make investments. You have the money to do them and you see the need for those investments. Amazon had 1.4 billion dollars in total available tax credits by 2018.

Fifth, stock is gold…

Stock based employee compensation…Amazon uses this extensively. This allows Amazon to pay employees using stock and then take the value of that stock off their tax bill. Employees, especially executives are rewarded with stocks. Amazon’s stocks were rising fairly substantially for many years. The size of that stock based compensation is really large now. It affords Amazon a large write off!

Upon a closer look the federal government ends up making just as much in the long run from stock based compensation because the stock is taxed when it’s sold.

On the contrary, there have been concerns because of the major difference between the value of the stock when it’s offered to employees versus the value when it’s written off. Executives have the right to purchase a certain number of shares of stock at a set price. The price of the stock goes way up. The company is then allowed to write off the value of that stock and suddenly the tax breaks can be huge. Amazon deducted about 1.1 billion dollars from its tax liability using this method in 2018.

That is how Amazon paid Amazon Amazon avoided Federal Tax for 2 years in a row. It was a whopping $0.

Amazon’s story is not exactly unique. Another disruptor was Netflix and the traditional auto company General Motors. Both reported expecting net federal income tax benefits in 2018 annual filings. When asked, Netflix highlighted the 131 million dollars it paid in taxes total. But it did not break out its federal bill.

All of this seems to be part of a larger trend over the past 70 years. There has been a decline in corporate income tax revenues in the decade.

The bottom line being, it is quite normal for some corporations to pay no income tax to the federal government.

Is this something you’re satisfied with?

Exit mobile version