U.S. companies face the highest official corporate tax rate in the world. But there's a big difference between the rates set out by law and the cash that's actually collected.
Large, profitable U.S. corporations paid an average effective federal tax rate of 12.6% in 2010, the Government Accountability Office said Monday.
The federal corporate tax rate stands at 35%, and jumps to 39.2% when state rates are taken into account. But thanks to things like tax credits, exemptions and, the actual tax burden of American companies is much lower.
In a report commissioned by Senators Carl Levin (D-Mich.) and Tom Coburn (R.-Okla.), the GAO looked at taxes paid by profitable U.S. corporations with at least $10 million in assets.
Even when foreign, state and local taxes were taken into account, the companies paid only 16.9% of their worldwide income in taxes in 2010.
Coburn said in a statement that the report "underscores the need for comprehensive tax reform."
"An individual's or corporation's tax rate shouldn't be dependent on their ability to hire a tax lobbyist," Coburn said. "It's especially wrong to ask families who are struggling to make ends meet to subsidize special breaks for corporations."
Republicans as well as President Obama have called for a lower statutory corporate rate along with the closing of loopholes. The prospects for such reform appear remote for now, given the fractious nature of the current Congress.
The GAO's calculation for effective corporate tax rates is lower than a number of previous estimates. That's in part because the office excluded unprofitable firms, which pay little or no taxes, from its analysis.
Including those firms' losses would reduce the total net income from which the average tax rate is calculated, and would not "accurately represent the tax rate on the profitable corporations that actually pay the tax," the GAO said.
The GAO used figures on taxes paid from actual IRS returns, which it noted were "on the whole, lower than the tax liabilities reported in the corporate financial statements."
U.S. corporate tax collection totaled 2.6% of GDP in 2011, according to the Organization for Economic Cooperation and Development. That was the eleventh lowest in a ranking of 27 wealthy nations.
The Senate's Permanent Subcommittee on Investigations has hauled several corporate executives to Capitol Hill over the past year for testimony on their tax practices.
A report released by the subcommittee last month charged that Apple (AAPL) used a complicated system of international subsidiaries and cost-shifting strategies to avoid paying taxes on some $74 billion in income from 2009 to 2012.
In September, the subcommittee heard from Microsoft (MSFT) and Hewlett-Packard (HPQ), whom Levin called "case studies of how U.S. multinational corporations... exploit the weaknesses in tax and accounting rules and lax enforcement."
A subcommittee report at the time alleged that Microsoft had saved nearly $7 billion off its U.S. tax bill since 2009 by using loopholes to shift profits offshore. H-P, the report said, avoided paying taxes through a series of loans that shifted billions of dollars between two offshore subsidiaries.
Galling Tax Loopholes Costing The US Government Billions
U.S. Corporations Pay Average Effective Tax Rate of 12.6 Percent
Several major U.S. corporations dodge domestic taxes by moving profits internationally to tax havens.
For example, a company can utilize the "double Irish" formula to minimize their U.S. taxes.
If the profits from the sale of a good stayed in the U.S., they would be taxed at the federal 35 percent rate. However, some companies sell the intellectual property rights to an Irish subsidiary to minimize tax obligations.
The profits from that U.S. sale are paid overseas to the Irish subsidiary. As long as the Irish subsidiary is controlled by managers elsewhere - for instance, a Caribbean tax haven - the profits can move around the world without a dime of taxation.
At this point, the profits are moved to a nation with no tax, skirting around the U.S. 35 percent rate.
This is the "Double" part of the Double Irish, and also entails a trip through the Netherlands.
When the same company's product is sold overseas, that profit is routed to a second Irish subsidiary, Since Ireland has treaties with the Netherlands to make inter-European transfers tax free, the profits are then routed through the Netherlands, and then back to the first Irish subsidiary, and then to the no-tax Caribbean Island.
As a result, the U.S. company never has to repatriate the money and they never has to pay taxes on the products.
Carried interest - profits made by private equity investment managers, hedge funds, venture capitalists, and real estate investment trusts - constitutes a major source of income for many financial professionals.
However, carried interest isn't taxed as income. Instead, it's taxed at the capital gains rate, which, at 15 percent, is considerably less than the top bracket tax rate of 39.6 percent that many of the financial professionals would pay.
Facebook reported $1.1 billion in pre-tax profits in 2012, but paid zero federal and state taxes while receiving a federal tax refund of around $429 million.
The reason is that the company took a multi-billion dollar tax deduction for the cost of executive stock options and share awards following their IPO.
In essence, Facebook was able to write off its entire federal tax obligation and more for paying its executives. This has raised the ire of a number of people in Washington, including Michigan Democratic Senator Carl Levin.
A line in the tax code allows a depreciation schedule of five years for private jets instead of seven, the standard for the rest of the airline industry.
Depreciation is an income tax deduction that allows taxpayers to recover the cost of buying the jet. This means that private jet owners can write off their expenses faster (in five years) and make back the money for the jet in less time.
This costs the U.S. government $300 million annually.
Originally designed for small farmers trading assets like livestock or property, the Section 1031 tax break allowed two farmers to avoid capital gains taxes on those transactions.
Since then, major corporations have successfully lobbied for an expansion. Because of this, many companies can go about their business of buying and selling assets, but can escape the capital gains tax, as long as they use all the proceeds from a sale to buy a "like-kind" asset.
For example, a real estate investment group can avoid taxation on a major land sale by invoking Section 1031, and using all proceeds from the sale on another land buy.
Wells Fargo, Cendant, and General Electric were recently sued for abusing the practice, but the law remains on the books.
In 2011 you could write-off the full cost of an SUV, provided it was used exclusively for business and weighed more than 6,000 pounds.
Since then the relevant section of the tax code — Section 179 — has been scaled back significantly, but the process still allows people to deduct the full purchase price of qualifying equipment or software if it's used for business.
Today, acceptable write-offs include taxis and vehicles that can seat more than nine passengers, have no seating behind the drivers seat, have a fully enclosed driver's compartment, or have a cargo area at least six feet in length (like a pickup truck).
When an executive flies on a private plane for business reasons, the company pays the bill and deducts the expense. However, if the flight is provided to the executive for personal reasons, the executives are required to pay income taxes on the amount the company paid for the flight, as the IRS considers travel as a form of compensation.
But if an outside security consultant says that the executives need a private jet for security reasons, the executive doesn't need to pay the tax.
According to Dealbook, it's "a common corporate tax trick," that allows many virtually anonymous executives - Melvin J. Gordon of Tootsie Roll Industries, Terry Lundgren of Macy's, the heads of Cablevision, Time Warner, Kraft, Waste Management, and Home Depot, for instance - to enjoy the kind of "security" that Apple didn't bother providing Steve Jobs.
Board members are also frequently rewarded with flights for "security" purposes.
As part of the TARP bailout, NASCAR owners got a huge tax gift written into the tax code. It's still around today, as it was extended for another year as part of the "Fiscal Cliff" deal.
Much like the private jet depreciation advantage, NASCAR track owners are now allowed to write off the cost of building facilities in seven years, rather than the 39 years the government estimates it actually takes for the tracks to depreciate.
This means that NASCAR track owners make their money back even faster, but the government loses $40 million each year.
Most real estate agents and brokers receive income in the form of commissions from sales transactions. You're generally not considered an employee under federal tax guidelines, but rather a self-employed sole proprietor, even if you're an agent or broker working for a real estate brokerage firm. This self-employed status allows you to deduct many of the expenses you incur in your real estate sales or property management activities. Careful record keeping and knowing your eligible write-offs are key to getting all of the tax deductions you're entitled to.
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