Recent research by the Institute on Taxation and Economic Policy (ITEP) finds that 55 of America’s largest corporations paid USD 0 in federal taxes last year. In the absence of corporate tax cuts in 2020, the 55 publicly held firms will have charged almost $12 billion in income tax rates, including $8.5 billion in tax evasion, and $3.5 billion in tax refunds.
According to the survey, for the last three years, almost half of businesses have stopped paying federal taxes. The firms Nike, FedEx, and DTE Energy have been among 26 companies with gross pre-tax revenue of $77 billion in the last three years, but with no federal income tax payable.
The news is coming as President Joe Biden tries to lift corporate taxes. This week, the White House revealed its intention to limit the number of businesses that don’t pay federal taxes to 28 per cent, which is projected to generate $2 trillion over 15 years.
How can multi billion dollar companies stop paying federal income taxes?
According to ITEP’s study, some of the country’s largest corporations have been evading federal taxation for decades, stretching back to the Reagan administration. The firms, which work in a wide range of markets, use several techniques, including tax exemptions and deductions to escape them.
While corporate tax records are private, publicly listed corporations are expected to file financial reports that contain federal income tax details. ITEP was able to examine some of the big tools the businesses used to stop paying federal taxes using accounting records as well as statistics on each company’s pre-tax revenue.
According to the Washington-based research group, the Trump administration’s Tax Cuts and Unemployment Act of 2017 amended the Internal Revenue Code of 1986, but the act failed to fix significant loopholes in the tax code. When President Trump announced his plan to slash corporate taxes in 2017, Congress had the perfect chance to close much of the loopholes that had helped businesses to stop paying taxes on a large portion of their revenue since the 1980s, according to the study. With three years of evidence on the effective tax rates charged by publicly traded firms now publicly available, it is clear that the Trump bill has had no impact on corporate tax evasion and may even be promoting it.
The top corporate income tax rate was reduced from 35 per cent to 21 per cent as part of the 2017 tax bill, a rate that is lower than the average for most of the 37 countries represented in the Organisation for Economic Co-operation and Development (OECD). The act also allows businesses to immediately deduct the cost of new machinery and equipment. Tax cuts for executive stock options, which allowed businesses to deduct stock-option costs, were among the loopholes uncovered by ITEP.
Nike and Hewlett Packard took advantage of federal research and experimentation tax credits, while DTE Energy and Duke Energy took advantage of renewable energy tax breaks to avoid paying federal taxes.
Moreover, the CARES Act made it much simpler for businesses to stop paying taxes. According to ITEP, as many as 55 corporations were granted over 500 million dollars in tax breaks under a 2.2 trillion CARES Act passed last year to further ease the economic hardship caused by the pandemic and help companies survive. According to the research group, dozens of publicly traded companies took advantage of a provision in the CARES Act that allows businesses to temporarily use losses in 2020 to offset profits earned in previous years. FedEx was one of the businesses that used it to cut tax costs when taxes were higher than in previous years. According to the CARES Act, firms such as FedEx continued to invest in capital, recruit staff members and employee pension plans to manage the quickly evolving economy and industry.
The left-leaning study group referred in their analysis to several changes to the tax code that could reduce the number of firms that do not pay federal charges, including a ‘floor fee’ on successful firms, as well as reducing tax breaches on public enterprises. To fund his $2 trillion infrastructure program, Biden has consistently expressed an interest in raising the taxes for large companies.
Biden called out Amazon in regards to federal taxes. Amazon resumed paying federal income tax in 2019 after paying USD 0 in federal taxes for 2 years. The Biden corporation was known to be one of many Fortune 500 firms that use tax-preventing deductions, while middle-class households do not have equal opportunity to pay more than 20 per cent of taxes. Biden said it was just wrong but he won’t punish them.
What are the ways or loopholes companies exploit to avoid taxes?
- Foreign affiliations:
Although the Corporate Tax Rate has dropped, businesses can save money with tax loopholes. This involves exploring means of moving US earnings to overseas subsidiaries, a phenomenon known as an offshore tax haven, in low-tax countries.
The TCJA (Tax Cuts and Jobs Act) gives businesses free offshoring benefits for tax savings. Until the money is repatriated from overseas, businesses would not have to pay taxes on profits received outside Canada. However, this tax can be indefinitely deferred if the income is held indefinitely outside the country. This money stored in foreign countries can be lent from and even invested in US properties.
Another technique used by Fortune 500 and other large tax avoidance firms is rapid depreciation. The relative freedom of tax policy allows businesses to invest their capital’s expenses at a quicker rate than they currently do.
As a result, the corporation can report lower profits and delay taxes until afterwards and the company can extend the tax deferment for an indefinite period while investing.
- Options of stock:
Providing employees with stock options is another way to reduce their total tax bill. It is also an option. If the options are exercised, a tax allowance may be claimed to distinguish between what workers’ pay for the stock and the cost value.
- Relevant business choices:
Finally, the federal tax code privileges some special sectors such as research, oil and gas processing, ethanol manufacturing, renewable power, video games, and film production. These sectoral privileges are used by the firms to gain special tax cuts.