Amazon and the truth about corporate taxes

Amazon’s relatively low corporate tax bills have drawn a lot of criticism from elected officials, including President Biden. Although Amazon has drawn the brunt of the recent wrath, many companies in different sectors of the US economy are using tax laws to reduce or even eliminate federal corporate taxes.

A sample of companies that make full use of tax laws is; food processor Archer Daniels Midland, delivery services company FedEx, shoemaker Nike, customer relationship management (CRM) software provider Salesforce. All of these companies are profitable and compete on the world stage.

Laws are put in place to increase or decrease various activities and induce specific behavior. Here are the four main provisions of tax law that businesses use to reduce the corporate tax burden. I will discuss whether or not the law encourages behavior that is beneficial to the competitiveness of U.S. businesses, consumers, and the U.S. economy, using Amazon as an example.

R&D credits

This law encourages companies to invest in research and development (R&D). Companies must constantly innovate to stay competitive and the federal R&D tax credit rewards them. I would say that this law is an incentive to adopt appropriate behavior to advance the American economy as a whole and foster our competitiveness in the world. Most governments around the world are also using this tool for economic progress.

The rules for the R&D tax credit can be found in Section 41 of the Internal Revenue Code (IRC) and apply to any taxpayer who incurs expenses for carrying out Qualified Research Activities (QRA) on the ground. American.

The federal R&D tax credit was a two-year incentive introduced in 1981. In 2015, the Protecting Americans Against Tax Hikes Act (PATH) was enacted, permanently extending the credit for R&D. tax for R&D and extending the scope of the legislation to small businesses and start-ups. without federal tax liability.

Amazon is a prime example of how the federal R&D tax credit has driven business behavior to benefit consumers and the U.S. economy. A patent portfolio can provide information about a company’s R&D investments. Amazon filed its first patent in 1995 and now holds thousands of patents, and those patents have followed the evolution of the online retailer.

Amazon has filed numerous patents for cloud computing. In the ten years since its launch, Amazon Web Services (AWS) ushered in the new era of cloud computing and became the most successful cloud services company on the planet.

Amazon has filed patents for augmented reality, speech analysis (think Alexa), and even a patent capable of recognizing your physical and emotional states suggest relevant solutions. This latest patent is a little scary, and we can debate the benefits to society.

Amazon has filed a multitude of patents related to logistics and networking technologies. We know the company has the logistics system to deliver one-day packages and outperform its logistics competitors. Amazon recently filed a patent for an airborne distribution center with drones for parcel delivery, an idea that may well become mainstream in the future.

Credits for “going green”

There are tax credits for renewable energy, including the Federal Production Tax Credit (CTP) and the Investment Tax Credit (CII). Again, I would say these tax incentives stimulate behavior that benefits society as a whole. 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 renewable energy buyer by launching a $ 100 million Right Now Climate Fund to support nature-based climate solutions. Amazon has ordered 100,000 electric delivery vehicles, the largest ever order for electric delivery vehicles. Amazon Web Services helps other businesses mitigate environmental impact by providing cloud-based technology infrastructure that is 3.6 times more energy efficient than a company’s data operations.

Accelerated deductions for investment in equipment

The Tax Cuts and Jobs Act, enacted in 2017, allows companies to write off capital investments immediately instead of capitalizing and depreciating the asset over a specified period. This provision of the tax law allows companies to be more competitive and efficient with more modern equipment.

Amazon is investing heavily in distribution center equipment, new server infrastructure to support the growth of cloud services, and transportation infrastructure.

The problem of stock options

I have to admit that this tax provision is a headache. I see no reason why this particular provision is doing anything beneficial.

Stock options are a compensation tool to attract and retain employees. Stock options are compensation in the form of contracts allowing their holder to buy the company’s shares at a fixed price for a specified period, generally ten years. There are also other models of equity compensation. For example, Amazon offers restricted stock units (RSUs) to employees.

The problem is that stock options are valued differently under US accounting rules compared to US tax rules. For accounting purposes and public disclosure to investors), companies should report the cost of stock options on the grant date. The value of the options declared at the grant date for accounting purposes is an estimate included in the books of the company as a compensation expense.

In contrast, tax rules allow a company to wait for stock options to be exercised and use the actual value at the date of exercise 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 accounting tax gap has allowed companies to disclose stock option expenses and reduce federal income taxes. The tax accounting gap allows companies to minimize profits for tax purposes while maximizing them in investor reporting, which is perfectly legal.

Wrap

In this article, I analyzed four of the main ways in which businesses legally reduce the tax burden on businesses. I have shown how Amazon serves investors and the greater good, and like many other profitable businesses, takes full advantage of corporate tax laws.

In my opinion, Amazon is unfairly denounced for not paying more taxes but rather savvy enough to take advantage of the provisions of the tax code which, in general, promote behaviors beneficial to the US economy and global competitiveness.

The tax provision that does not meet this test encourages companies to minimize expenses related to registered stock options to maximize income and to grant excessive stock options to key employees to take advantage of deductions. excessive taxes. A provision that could easily be fixed by requiring companies to measure stock option compensation in the same way for accounting and tax purposes.

Note: The editors and editors of Moor Insights & Strategy may have contributed to this article.

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