Senators Target Facebook With Bill That Would Close Stock-Option Loophole
Facebook executives with lucrative stock options aren’t the only ones set to benefit from the company’s highly anticipated debut on the stock market this spring. The social media juggernaut stands to save billions of dollars on its tax bill, as well.
Sens. Carl Levin (D-Mich.) and Kent Conrad (D-N.D.) introduced a bill Wednesday that would close what they called a significant loophole in the country’s tax code, which allows companies to take a hefty deduction when employees cash in their stock options.
Facebook anticipates its deduction will be so large that it will wipe out the company’s tax obligations for all of 2011, according to the firm’s regulatory filing for its initial public offering. The company also expects to get as much as $500 million in refunds applied to the taxes it paid over the last two years.
All of this is legal. Under current law, companies can take a deduction when employees cash in stock options. The thinking is that compensating employees with stock options is an expense for companies that the government wants to offset.
Levin and Conrad argue that companies are being allowed to save more than is fair. When they report this expense to Uncle Sam, firms claim a deduction equal to the market value of the shares. But when they report the cost of these options to their shareholders, they use the amount employees paid for the shares — typically far less.
“The books show a highly profitable company — profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees,” said Sen. Levin in a floor speech. “But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.”
For instance, Facebook founder Mark Zuckerberg paid six cents for each of his 120 million shares. When he exercises those options, they are expected to be worth $40.