Dem senator claims Facebook is using loophole to avoid taxes

Sen. Carl Levin (D-Mich.) on Wednesday said Facebook is using a loophole in the tax code to avoid paying taxes to the federal government.

The end result is that a profitable U.S. corporation — a success story — could end up paying no taxes at all for years, even decades, Levin claimed in a speech on the Senate floor.

He said the loophole, regarding how the company reports the value of its stock, could allow Facebook to avoid $3 billion in taxes.

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Facebook announced plans to begin selling stock earlier this month after months of speculation. CEO Mark Zuckerberg will receive 120 million shares, worth as much as $5 billion. 

When Facebook first gave the stocks to Zuckerberg, the company calculated their value at 6 cents per share. But the company plans to claim a tax deduction based on the current value of the stock, which could be $40 per share.

So 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, Levin said. 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.

Levin said the tax break shows the need to pass his legislation, which would bar companies from claiming tax deductions on stock options that are valued at more than what they report to shareholders.

I emphasize that Facebook’s actions are within the law, he said. 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.

The deduction applies only to Facebook’s corporate tax rate and not the taxes individuals such as Zuckerberg will pay on their earnings. 

Facebook did not respond to a request to comment, but critics of Levin’s legislation said the tax break encourages investment in startups that might eventually go public.

— This story was updated at 2:29 p.m.