Amazon’s relatively low corporate tax bills have generated much criticism from elected officials, including President Biden. Although Amazon has drawn the brunt of the recent ire, many companies across different sectors of the U.S. economy use tax laws to reduce or even zero out federal corporate tax.
A sampling of companies that use the tax laws to full advantage is; food processing company Archer Daniels Midland, delivery services company FedEx, shoemaker Nike, customer relationship management (CRM) software provider Salesforce. All these companies are profitable and compete on the global stage.
Laws are put in place to increase or decrease various activities and drive a specific behavior. What follows is the four key provisions of the tax law that companies use to reduce the corporate tax burden. I will discuss whether or not the law is driving behavior that is beneficial to the competitiveness of American companies, consumers, and the U.S. economy, using Amazon as an example.
Credits for R&D
This law provides incentives to companies to invest in research and development (R&D). Companies must constantly innovate to remain competitive, and the Federal R&D tax credit rewards them for doing so. I would argue that this law drives the proper behavior to advance the overall U.S. economy and enable our competitiveness worldwide. Most governments around the world also use this tool for economic advancement.
The rules of the R&D tax credit can be found under Internal Revenue Code (IRC) section 41 and applies to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on U.S. soil.
The federal R&D tax credit was a two-year incentive introduced in 1981. In 2015, the Protecting Americans from Tax Hikes (PATH) Act was enacted, permanently extending the R&D tax credit and expanded the scope of the legislation to small businesses and startup businesses with no federal tax liability.
Amazon is an excellent example of how the Federal R&D tax credit has driven corporate behavior to benefit consumers and the U.S. economy. A patent portfolio can provide insights into a company’s R&D investment. Amazon filed its first patent in 1995 and now owns thousands of patents, and those patents have tracked the evolution of the online retailer.
Amazon has filed many patents for cloud computing. In the ten years since its launch, Amazon Web Services (AWS) ushered in the new era of cloud computing and has grown into the most successful cloud computing services company on the planet.
Amazon has filed patents for augmented reality, speech analysis (think Alexa), and even a patent that can recognize your physical and emotional states suggest relevant solutions. That last patent is a tad creepy, and we can debate the benefit to society.
Amazon has filed a host of patents related to logistics and networking technologies. We know the company has the logistic system to deliver one-day packages and overtake its logistics rivals. Amazon has recently filed a patent for an airborne fulfillment center with drones for package deliveries, an idea that can well become commonplace in the future.
Credits for “going green”
There are tax credits for renewable energy, including the Federal Production Tax Credit (PTC) and Investment Tax Credit (ITC). Again, I would argue these tax incentives drive behavior that benefits society at large. Amazon co-founded The Climate Pledge and Global Optimism to be net-zero carbon by 2040. To date, Amazon has recruited 31 other companies, including Unilever, Uber, Verizon, Microsoft, JetBlue, and Best Buy. Amazon recently became the world's largest corporate buyer of renewable energy while launching a $100 million Right Now Climate Fund to support nature-based climate solutions. Amazon ordered 100,000 electric delivery vehicles, the most significant order ever of electric delivery vehicles. Amazon Web Services helps other enterprises mitigate the environmental impact by providing technology infrastructure in the cloud that is 3.6 times more energy-efficient than a companies' data operations.
Accelerated deductions for equipment investment
The Tax Cuts and Jobs Act, enacted in 2017, allows companies to immediately write off capital investments instead of capitalizing and depreciating the asset over a specified period. This provision in the tax law enables companies to be more competitive and efficient with more modern equipment.
Amazon heavily invests in equipment in the fulfillment centers, new server infrastructure to support cloud services growth, and transportation infrastructure.
The trouble with stock options
I must admit this tax provision is a head-scratcher. I can think of no reason as to why this particular provision results in anything beneficial.
Stock options are a compensation tool to attract and retain employees. Stock options are compensation in the form of contracts allowing the holder to purchase the company's stock at a set price for a fixed period, usually ten years. There are other equity compensation models as well. For example, Amazon offers employee restricted stock units (RSUs).
The issue is that stock options are valued differently using U.S. accounting rules compared to U.S. tax rules. For accounting purposes and public disclosures to investors), corporations must report the cost of stock options on the grant date. The options' value declared on the grant date for accounting purposes is an estimate included on the corporate books as a compensation expense.
On the other hand, tax rules allow a company to wait until the stock options are exercised and use the actual value on the exercise date to calculate the amount of the company's tax deduction. In most cases, if the underlying stock has appreciated, the value will far exceed the estimated value reported for accounting purposes.
This so-called book-tax gap has enabled corporations to disclose stock option expenses and reduce federal income taxes. The book-tax accounting gap allows corporations to minimize earnings for tax purposes while maximizing them in reports to investors, all of which is perfectly legal.
In this article, I analyzed four of the critical ways corporations legally reduce the corporate tax burden. I showed how Amazon is serving investors and the greater good and, like many other profitable companies, taking full advantage of the corporate tax laws.
In my opinion, Amazon is denounced unfairly for not paying more taxes but rather savvy enough to take advantage of provisions in the tax code that in general promote beneficial behaviors beneficial to the U.S. economy and global competitiveness.
The tax provision that does not meet this criterion encourages corporations to minimize the stock option expenses recorded to maximize income and grant excessive stock options to key employees to take advantage of excessive tax deductions. A provision that could easily be fixed by requiring corporations to value stock options compensation the same way for accounting and tax purposes.
Note: Moor Insights & Strategy writers and editors may have contributed to this article.