Corporations Reap Tax Windfalls on Stock Options

From Web CPA:

Corporations that issued stock options to their executives claimed tax deductions that were collectively $52 billion larger than the expenses shown on their books in 2008, according to newly released data.

Senate Permanent Subcommittee on Investigations Chairman Carl Levin, D-Mich., highlighted the IRS data Wednesday. “Current stock option accounting and tax rules are out of kilter, lead to corporations reporting inconsistent stock option expenses on their financial books versus their tax returns, and often produce huge tax windfalls for companies that pay their executives with large stock option grants,” he said in a statement.

IRS data from 2008 shows that U.S. companies reduced their taxes by billions of dollars by claiming $52 billion more in stock option tax deductions than the stock option expenses shown on their books, Levin noted. The figures from prior years are $48 billion in excess stock option tax deductions in 2007; $61 billion in 2006; and $43 billion in 2005.

To address the mismatch between the treatment of stock options on companies’ books and tax returns, Levin and Sen. John McCain, R-Ariz., have introduced S. 1491, the Ending Excessive Corporate Deductions for Stock Options Act. This legislation would curb excessive corporate tax deductions for stock options, by requiring that the corporate tax deduction for stock option compensation be no greater than the expense shown on corporate financial reports filed with the Securities and Exchange Commission.

Exclusion of Gain on the Sale of Certain Small Business Stock

Good news for individuals who invest in small businesses; you can now get an extra tax incentive!

As part of the American Recovery and Reinvestment Act (ARRA), investors in qualified small business stock can exclude 75 percent of the gain when they sell their stock. You usually can exclude up to 50% of your gain from your income from the sale or trade of qualified small business stock. See http://www.irs.gov/pub/irs-pdf/p550.pdf for more. This exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. In most cases, the exclusion rate for previously-acquired stock remains at 50 percent. The remaining gain will be taxed at a lower rate than what generally applies to one’s income. These lower rates are called the maximum capital gain rates.

So, how do you know if you are eligible for the tax incentive? In order to know whether it applies to you, you need to understand how the IRS defines small business and small business stock.

Description of qualified "small business": To qualify as a small business for the exclusion

1. The stock must be in a C corporation
2. The corporation’s gross assets cannot have exceeded $50 million when the stock was issued
3. The corporation, including all “over 50-percent-owned” subsidiaries, cannot have gross assets that exceed $50 million. This includes cash, the value of contributed property, and the bases of other assets, without regard for short-term debt.

As an eligible corporation, you must submit information regarding your corporation’s aggregate gross assets to the Secretary of the Treasury and to your stockholders.

If you are an investor, talk to your CPA or tax attorney to make sure you qualify for this tax break. Hopefully this new incentive will help you out next tax season. I wish everyone success in their investing adventures!

IRS Data Show Tax Agency Audits Big Firms Less Often

According to new data from the IRS, there has been a 20% drop in number of audits being performed on companies with more than $250 million in assets over the past decade. As Kevin McCoy of USA Today explains, although these numbers are surprising, the data could be somewhat misleading as the total number of returns filed changes every year.

The data confirm a downward trend identified in a critical analysis this week by the Transactional Records Access Clearinghouse, a non-partisan research organization based at Syracuse University. The IRS provided the data to USA TODAY after questioning TRAC's conclusions.

"There's been a steady decline in IRS audits of the largest corporations," said TRAC co-director Sue Long.

The drop is significant for taxpayers — who face a midnight deadline to file their personal income tax returns — because TRAC found the IRS identified nearly $28.6 billion in tax-underreporting by the nation's largest firms in fiscal year 2009.

The IRS said audit percentages are an imperfect measure because they include tax returns filed, a changing number the agency can't control. The annual number of large corporation audits rose more than 22% in the last decade, IRS data show.

Continue reading at USA Today.com…

War Surtax: 'Pay as you Fight'

From Politico.com:

After months of listening to conservatives caterwaul over deficits and health care, senior House Democrats want a graduated surtax on individuals and corporations to pay for another big drain on the treasury: the Afghanistan war.

Three full committee chairmen — including the House’s top tax writer, Ways and Means Committee Chairman Charles Rangel (D-N.Y.) — are backing the initiative together with the chair of the party caucus, Rep. John Larson (D-Conn.), and close allies of Speaker Nancy Pelosi.

The speaker has been silent thus far, and many dismiss the idea as more rhetoric than real legislation. But with President Barack Obama due to make a final decision soon on adding more U.S. troops, the initiative testifies to the growing restlessness among Democrats over the costs of the American commitment in Afghanistan.

Today’s jobless rate — far worse than during the height of the Vietnam War in the '60s — adds to this angst. And Rep. John Murtha (D-Pa.), who oversees the Pentagon’s budget and supports the surtax, went so far as to send Obama last month a copy of Yale historian Paul Kennedy’s “The Rise and Fall of the Great Powers.”

U.S. military spending in Afghanistan had reached $3.6 billion a month this summer — or more than $43 billion a year, according to estimates by the Congressional Research Service. And in the course of meeting with lawmakers, Obama has used a rough measuring stick that every 1,000 troops added will add another $1 billion to this annual basis.

Report Shows Most Companies Avoid Federal Taxes

From the Associated Press:

“Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.

The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

‘It's shameful that so many corporations make big profits and pay nothing to support our country,’ said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called ‘S’ corporations pay taxes under individual tax codes.

‘Half of all business income in the United States now ends up going through the individual tax code,’ Edwards said.

The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.

The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns for the years 1998 through 2005. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.

Dorgan and Levin have complained about companies abusing transfer prices - amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.

‘It's time for the big corporations to pay their fair share,’ Dorgan said.

New Law Could Drastically Raise Taxes On Multinational Corporations

Pressure is growing in Washington to force a tax on foreign companies with subsidiaries in the United States who move funds back to their parent countries that have more favorable tax rates. These businesses currently pay next to nothing in taxes. In response, the United States House of Representatives has already voted to increase tax rates to as much as 30%. However, business groups are saying the measure could deter firms from investing in the United States. Multiple lobby groups state that about 60 multinational companies have already expressed concern about the proposal, which is likely to be considered by the United States Senate some time next month.

Democrats in Congress are regarding the proposal, known as the Doggett law, as a legitimate crackdown on cooperate tax avoidance. They are hoping the tax could raise an estimated $7 billion per year.

The goal of the proposal is to stop multinational corporations from going "treaty shopping" to find countries with more friendly tax laws. If approved by the Senate, the proposal could see firms paying a tax of up to 30% on interest payments and other capital flows between US operating countries and their parent businesses. This tax would be enforced even if the funds were being transferred to affiliates in the United Kingdom and the Netherlands. This would disrupt a historically tax fee practice that was based upon existing "tax-free" treaties between the United States and these countries. Yet, experts claim that firms based in countries without treaties such as South Korea and Singapore would be hit even harder by the new tax.

The new tax was added as an amendment to a farm appropriations bill drafted earlier this year by a Texas congressman. The practice of adding new legislation as an amendment to another popular bill is common in Congress as a way of negotiating the approval of a law. When making such an amendment to a popular bill members of Congress can dramatically improve their chances of getting a controversial new law passed.

However, numerous Republicans fighting in the Democrat controlled Congress have said the proposals flew in the face of existing treaties with other countries, and were based on a misconceived idea that equates tax avoidance with seeking to find a competitive tax position. "These companies are not doing anything illegal," claims Rhian Chilcott, director of a lobbyist group in Washington. "They are taking advantage of a tax treaty that the United States negotiated years ago." He went on to explain that many local subsidiaries are already paying taxes and would effectively be taxed twice on their income.

However, the Democrats who support the law are emphasizing that the law will be specifically focused on preventing tax havens that are used to hide earning. They claim the goal of the law is not to target legitimate companies that are paying their taxes. Rather it will attempt to gain revenue from companies abusing the treaties to pay little or no taxes on their income. Many massive multinational corporations setup offices in locations that have tax-free treaties with the United States for the sole purpose of avoiding tax liabilities.

For example, if the legislation passed, Samsung’s South Korean conglomerate would not be eligible to make tax-free transfers from it’s United States division to it’s United Kingdom financing unit. Currently the company pays a zero tax rate on such transfers because of the Anglo-American treaty. Samsung’s United States subsidiary would instead be forced to pay the 15-cent tax rate that applies to all Korean companies on transfers from the United States. Unfortunately, no representative from Samsung would comment on the new law.

The measure would also dramatically hit Japanese carmakers with large United States operations. Nissan is one automaker that would likely see increased taxes as a result of the legislation. Several international companies are currently lobbying against the legislation including Panasonic, Unilever, Alcatel-Lucent, Swiss Re, and Allianz. An executive from an undisclosed global corporation said, "this is another signal that the United States is not a friendly place to do business. We do not need this. We can go to Canada or Mexico."