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Don't attack Zoom for its $0 federal tax bill

Don't attack Zoom for its $0 federal tax bill
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Before the pandemic hit, few people had ever used the video conferencing platform Zoom. Fast forward to 2021 and it’s a household name for anyone who has tried to work, learn, or host a virtual event. The company saw its net income jump from roughly $25 million to $672 million in the last year, but one thing remains unchanged on the company’s latest financial report: current federal tax expense held steady at $0.

Cue the angry tweets from politicians like Sen. Bernie SandersBernie SandersStudy: Early unemployment cutoff would cost 16M people 0B Machine Gun Kelly reveals how Bernie Sanders aided him in his relationship with Megan Fox Overnight Health Care: CDC approves Pfizer vaccine for adolescents aged 12-15 | House moderates signal concerns with Pelosi drug pricing bill | Panel blasts COVID-19 response MORE (I-Vt.), complaining that this is yet another indication of a “rigged tax code” that “benefits the wealthy & powerful.” While Sanders is correct that many aspects of the U.S. tax system do favor the wealthy, this is not one of them. Companies like Zoom and Amazon are the wrong targets for a very simple reason that politicians choose to ignore: Paying employees with stock options is a good thing.

Many start-up companies (like Zoom and Amazon once were) are cash-strapped and can’t afford to pay their employees what they are worth, so they make up the difference with stock options. These options don’t just go to the “wealthy and powerful” corporate executives, they go to the engineers, sales team, HR — even Amazon’s warehouse workers once received this benefit. This is nothing new. When I picked up a barista job at Starbucks in the early 2000s, the company was happy to share stories of baristas who now drove fancy cars thanks to the company’s employee stock plan.

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So how do companies use stock compensation to “game the system” and “avoid” federal income tax? They follow the rules. The dirty truth is that companies like Zoom and Amazon have almost no control over how stock compensation will impact their tax bill. The reason for the dramatic tax-saving effects has to do with the timing of when companies are allowed to deduct these costs for the purposes of financial statements (US GAAP) and taxes (Internal Revenue Code), and how those two rules differ.

For financial statement purposes, companies use a complex valuation process to estimate the fair market value of the stock options, and that amount is taken as an expense on the company’s books when they are first issued.

But tax law hates estimates, for good reason, so the Internal Revenue Code tells a company that no deduction is allowed until a future year when the employee exercises the options and the actual fair market value is determined.

For companies like Amazon and Zoom, those intervening years between issue and exercise can make a big difference when it comes to the value of those stock options. The estimated value of Zoom’s stock options was certainly far lower when first issued to its employees (and expensed on the company’s books) than when the employees exercised those options after the stock price shot up to over $500 per share during 2020. (For context, the initial share price when Zoom first went public in April 2019 was $36.) However, the value of Zoom’s stock is not something that was within the company’s control. Zoom didn’t take advantage of a “rigged system” or exploit some “corporate loophole” — it just followed the rules.

Meanwhile, the angry tweets about Zoom and Amazon’s tax bills ignores the very real benefit that thousands of average workers realize when their stock options increase in value. Those workers, whether they be wealthy executives or low-wage warehouse employees, will have to report the value of that stock as income on their respective individual income tax returns when the options are exercised. Additionally, those individuals will likely pay more tax dollars to Uncle Sam through income tax on that stock compensation than the company saved by taking it as a deduction, given that individual tax rates for middle- and high-income taxpayers are above the current 21 percent corporate rate.

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So why go after companies whose success ultimately benefits their employees? If politicians genuinely perceive this as a problem, what’s the solution? Absent from the angry tweets is any real policy proposal. Sen. Sanders has yet to suggest how he would change the tax laws to tax these options differently. The problem with these attacks is that this is one area of the tax code where the existing rules are actually quite fair, despite the occasional windfall to companies whose stock significantly appreciates in value over a short period of time.

The U.S. tax code permits a company to take a deduction for compensation paid to its employees, whether that be cash or stock. If, instead of stock options, Zoom had decided to pay all of its long-time employees a cash bonus of $100,000 each for their years of faithful service, would those on the left still be angry that this successful company reduced its taxable income by paying average workers extraordinary wages? If anything, Zoom would be lauded as a model corporate citizen.

There are plenty of problems with the tax code and ways to fix it that can make a meaningful difference for progressive goals. This is not one of them. Zoom and Amazon may be convenient targets due to their high profile, but they are the wrong targets if our goal is to actually fix the areas of our tax system that need fixing.

Christina Rice is the Director of the Graduate Tax Program at Boston University School of Law and an expert in the area of tax law and policy. Follow her on Twitter @BULawTaxMom