According to the Government Accountability Office, in any given year, at least 60% of US corporations surveyed paid no federal income tax liability for 1998 to 2005 (the years studied). That statistic includes corporations of varied sizes.
If the trends in the survey are accurate, nearly one quarter of large US corporations don’t pay any federal income tax at least half of the time. Large U.S. corporations are those with at least $250 million in assets or gross annual receipts of at least $50 million.
Even more interesting? Nearly three-quarters of large foreign-owned corporations operating in the US reported no tax liability for at least one of the seven years in the study. Foreign-owned corporations are required to file and pay federal income taxes if they are doing business in the US.
So how do so many corporation escape taxation? Deductions and credits. Corporations wipe out their tax liability by using tax credits or net operating losses (NOLs) from excess deductions. NOLs allow a company to deduct losses generated in previous years in a current year. In contrast, individuals, unless reporting business losses on their personal returns, are not allowed to carry forward federal income tax losses. In other words, if a company has a good year, it can offset taxable income from losses it faced in a bad year. If an individual has a bad year, the loss is wiped clean.
The GAO also noted in its report that taxable income in many corporations differed from profits reported to shareholders. Companies that are reporting no taxable income are still reporting profits to shareholders. This is an exercise in accounting, to be sure, but proof to some that the corporate tax structure needs to be fixed – and soon.
Corporate tax issues have been on the political agenda even before the report was released. Amid rising profits for companies and rising costs to taxpayers, both presidential candidates, Senators McCain and Obama, have vowed to close corporate tax loopholes. My bet is that no matter who becomes president, it won’t happen. And I’m not even cynical – just realistic (did you see those numbers?).
The comparison with individual rules is misleading. Business losses can be carried forward and back, whether they occur in a corporation or on a 1040, so it’s not like individual rules are draconian compared to corporate rules.
I didn’t mean to imply that they’re draconian. My point is that if you have a low salary year and high deductions (not as business), you’re simply stuck. A corporation is not. That may be a reason why so many corporations do not actually pay tax – even in good years.
These annual “corporations that pay no taxes” articles are so misleading. Companies with huge revenues will pay no taxes when they have more deductions than income. Do we really expect big companies to pay income taxes when they lose money? Or if they lost $2.0 million last year and made $1.0 million this year. These articles leave people with the impression of some big corporate tax scams, and for the most part, that’s not whats going on.
Tom, I disagree that it’s misleading. I think it was clear from the GAO that the reasons for the “no tax” are tax credits and NOLs, neither of which represent actual economic losses for the year. And I think that’s the criticism – that the tax system as written doesn’t reflect economic reality. Whether it should or not is another issue entire, but I think that’s the point.
Kelly,
I don’t see the problem here. Sure, it’s always been true that a lot of corporations are able to get their taxable income down to zero — but the whole idea of deductions and credits is to tax businesses only on profit, not revenue.
What needs to be addressed is not this side of the coin — it’s that individuals can’t deduct their cost of earning a living. This point hit home when I was laid off from a W-2 job as a technical writer and started working as a 1099 consultant — that was back in 1991. As a W-2 employee, I couldn’t deduct much of anything related to work — but as a 1099, I could deduct all sorts of stuff — mileage to and from work, computer expenses, training, a portion of meals, etc., etc., etc. THAT is the part of it that’s unfair — that the poor W-2 employee is stuck paying tax on revenue, while the business pays tax only on profit.
Urb
Actually Urb, mileage from home to a place of work, whether you are a 1099 person or W-2, is not dedutible. A self employed person does have less hurdles to jump over to lessen their taxable income for work releated expenses. Of course the self employed person does pay self employment tax.
This brings up another issue I wonder how much social security and medicare tax all those corporations paid?
I think the article is misleading, and I am a bit surprised because Tax Girl is usually right on. This time her politics got the best of her. Don’t forget that due to the corporate AMT, a corporation with a huge NOL could still have a corporate tax liability. Furthermore, many closely held corporations “bonus” out all of their profits to avoid the corporate level tax, and potential double taxation. So again, I find this column to be terribly mis-leading and nothing more that trying to demonize business interests.
Hmm. I find the comments here surprising – and enlightening – which are both good.
I’m not trying to demonize business interests at all. In fact, a lot of my clients are businesses that are happy to take advantage of all of these credits and deductions.
I was trying to summarize the GAO report (which made a big deal of the stats, I’ll try to post the link later today) and point out that it is a concern of Congress and individual taxpayers that the tax system allows for profitable companies to avoid paying income tax. I’m not saying it’s a problem that companies are taking advantage of the system – I’m saying it’s not popular to hear that large companies are not paying tax at a time when individuals feel that their tax burdens are too high. If it were not a concern for individual taxpayers, BOTH political candidates would not be promising to fix corporate tax loopholes.
Rick,
Hmmm; I always thought you could deduct that — certainly as a freelance musician (when that was a significant portion of my income, which only happened a couple of times), I always used to deduct mileage to and from gigs.
Can you clarify who is and is not allowed to deduct mileage?
Thanks,
Urb
If you work a second job your mileage from job one to job two is deductible on a 2106 (which flows to the Sch A) if your work is as a sales person (or anyone who visits mutiple locations in a day) your mileage after your first stop is dedutible on the Sch C if self employed or the 2106 if employed and not fully reimbursed.
Also if you are going to a temp. job assignment your mile to and from that place of work is deductible.
Okay — after being laid off from my “permanent” W-2 job in ’91, I worked as a contractor (1099, working independently, not through an agency) at one site for about five months; in ’92-3, I did another independent contract project for a different company, which lasted about 7 months. The tax code may have changed since then, but my preparer at that time said I could keep a mileage log and write off the standard rate. Don’t quote me! 😀
My understanding is that would be called commuting, I’ve only been doing tax prep since ’97. But today I’d advise a client that the situation you describe would be commuting and not dedutible mileage expense.
Kelly, you disagree? (totally off the subject of this article)
As a musician it gets a little trickier. Here are the rules:
Commuting expenses. You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.
However, if you had a studio were you regularly practiced in your garage or basement that could qualify as a home office. As long as that area was ONLY used for business. Then trips from your home (office) to another place of business (a gig) would be deductible.
Office in the home. If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business.
Urb,
See Kelly, June 20th 2008 article on mileage.
Here’s the short post referenced by Rick: http://www.taxgirl.com/ask-the-taxgirl-mileage/
Rick and Oxnate are right. Urbie, it’s possible that your accountant felt that your indy status made your travels not a commute (aggressive but perhaps defensible depending upon what you were doing).
General rule is that going to/from work is not deductible. Exceptions include when “work” moves about (sales people, musicians, etc.).
The deception here is that any business pays taxes. It is the customers of businesses that pay in the form of higher prices for the good or service being provided. The corporate tax is a deceptive means by the government to hide the taxes we pay (the withholding tax being another example) for political purposes.
What you say is incorrect as it pertains to personal net operating losses. If you own rental properties and or a business and your losses exceed your other income you can carry those forward.
When you say profitable companies avoid paying tax, I get skeptical. Obviously if deductions are in excess of revenue, the company is not profitable. Furthermore, if a corporation looses 2 million in year 1 and then has a 100K profit in year 2, are they really profitable?
The truly profitable company who pays no tax due to “loopholes” and “unfair” tax credits is an anomoly. No?
I guess I’ll have to vote “misleading” on this. Although you may have been reporting on the issues raised by the GAO, it didn’t come across that way because there was too much emphasis on “loopholes” and “corporations not paying taxes” which does not play well to those unfamiliar with taxation of corporations and other businesses. The GAO knows as well as anyone that when politicians want businesses to take some kind action, they persuade them through the use of credits and special deductions. That’s why taxable income and accounting income (GAAP) bear little similarity. They also know that taxing one good year without allowing the business to recover the capital it lost is double taxation on prior earnings and just bad tax policy.
Therefore, if the GAO is going to go down this path, it needs to tell politicians to stop trying to manipulate business owners through the tax system (fat chance) but leave NOL’s alone. When they make these announcements, it sounds like something entirely different to those who don’t understand.
Gordon –
Thanks for the comment. To clarify, I did note personal business losses in the post – I specifically said that individuals can’t take NOLs “unless reporting business losses on their personal returns.”
Jim,
When “profitable” corporations don’t have any tax liability, it’s important to keep in mind that there are two sets of numbers: GAAP income and taxable income — a company that is making a profit, in terms of what it reports on the income statement, might still have no tax liability (or even a NOL). So it’s not just that liberal soak-the-rich types like to babble about “profitable companies not paying taxes” (although they do like to babble about that); GAAP income does not equal taxable income!
Urb (not an accountant, but I do have a BS in accounting… with emphasis on the BS!)
Urb – In my experience, taxable income usually reflects true income more than GAAP. I also find that more often than not GAAP income is actually higher than taxable income (for small business anyway), given the disallowance of life insurance, meals & entertainment, Section 263A adjustments, bla bla bla.
Bill was spot on in his comments. The GAO can make the numbers look any way they want, and while Kelly is only reporting their repot, both of them know this is a bunch of bull aimed to rile up Joe six pack.
This report is mostly much ado about nothing. First off, as the Tax Foundation reports this morning, the “25% of large corporations” figure reported by the AP was incorrect – it’s more like 0.28%:
http://www.taxfoundation.org/press/show/23469.html
Second, most corporations in the US are tiny or just shells. In 2005, the IRS reported that more than 75% of C-Corps and 87% of all corps had assets of less than $1 million. Those 87% of corporations hold only 0.4% of all corporate assets.
If you want to take anything away from this report, it’s that foreign-controlled US corporations continue to use aggressive transfer pricing practices to shift profits offshore. But it’s not news – it’s been reported for 20 years.
Speaking of sneaky, I know someone who set up their beach house address as an S-Corp? How in the world can someone do this?
Jim,
So you’re saying GAAP income is really aimed more at investors? That makes sense — people are going to pay more for your shares if the EPS looks good!
Urb
Urb – I don’t know, I think GAAP tries to look at the company as a whole, and not necessarily reflect one year of activity like a tax return does. I am not a GAAP expert, and not an auditor, so I don’t really know much about it, but I stand by my comments that a truly profitable company rarely can avoid taxation.
Like most major problems with our insane tax code, this issue has a clear solution, and it’s called the FairTax. This issue only goes away when there are NO corporate income taxes. All it takes is one microecomics class in college to understand all these taxes are passed on to the consumer anyways. All this meaningless talk about corporate tax credits and dodging taxes when corporations only pay about 6% of the national tax bill and probably allocate a million hardworking Americans to tax code shenanigans instead of science, engineering, and technology. We really need to stop these meaningless conversations and start making some good decisions on sound data – the rest of the world is passing us by my fellow americans! Corporations will always find ways to get around taxes, always!
Jim is correct in that GAAP looks at the company as a whole. To elaborate, GAAP is the sum of the knowledge and procedures available to accurately measure and report the financial performance and position of a business. GAAP financial statements should convey reliable information about the business that can be used for decision making. In contrast, taxable income is simply an arbitrary number obtained through the application of an enormous volume of meaningless rules concocted by politicians who know so little about it they can’t fill out their own tax returns. From that number, the tax rates are then applied. That’s why it is silly to complain that a corporation can report income to investors and losses on their tax returns. One is designed to show the performance while the other is just a means to calculate the tax. The two just aren’t related.
Bill – GAAP and Tax are different for sure, but when I calculate taxable income on my M-3 for a company that has audited financial statements (I hate M-3), I start with GAAP income and then make adjustments to determine taxable income, somethimes there are numerous adjustments, sometimes very few.
As always, I stick to my claim that profitable comapnies and/or their owners pay their “fair” share of taxes, if not more.
That’s right, Jim. You have to start with the real income and work toward an arbitrary amount that changes on a regular basis. I think that’s because GAAP attempts to accurately measure the performance of a business while tax law basically applies the tax to all income except what is specifically allowed as a deduction or exclusion against it. Looking at it that way, I’m amazed that the two come as close as they do. And you are absolutely right-a truly profitable company will pay its tax. So will wealthy individuals, contrary to what many think.
“As always, I stick to my claim that profitable comapnies and/or their owners pay their “fair” share of taxes, if not more.”
Bill, what (if anything) does this say about the effectiveness of using tax policy to encourage… stuff Congress wants to encourage, e.g., investment of certain types? Are businesses — at least your clients — significantly influenced by the tax implications of what they do, or do they just figure out what’s the best business decision and let the tax consequences take care of themselves? (Which is another way of asking, should Congress spend more, or less, time concocting deductions and credits to try to influence people’s and companies’ behavior?)
Urb
That’s a great question, Urb. I’m surprised that it isn’t asked more often. My business and individual clients generally ignore the “gimmick” tax junk that Congress concocts to manipulate taxpayers and focus on making money. By the time it becomes law, it has so many hoops to jump through and the benefit is so insignificant that they just leave it to us to figure out. Some of that stuff costs more in fees to implement than the taxes saved. Occasionally, they may time their decisions to meet a qualification, but it would pertain to something their business needs anyway.
On the other hand, the clients will seriously consider the tax consequences of material issues, such as new facilities, relocation, acquisitions, choice of entity, method of accounting, and so-on.
Congress has created a tax system that nobody can work with. It is uncertain and does not allow for any solid planning. A good example of that was the 1986 tax act which changed the tax breaks on real estate so sharply that it triggered a collapse in real estate. I think things would change overnight if the members had to fill out their own tax returns without any help!
Ooo!!! I like that idea!
All Congresspersons and Senators MUST complete their own tax return without any outside help.
I’ll add my own idea. All those returns MUST be audited by the IRS. All penalties and interest are doubled.
Oxnate, THAT is fabulous! 🙂
No withholding, either — they have to file quarterly and pay cash!
Urb
Thanks for the post. According to IRS stats, in 2004 66% of corporate filings were S corporation filings that are not required to pay any tax at all. That alone makes the Dorgan/Levin interpretation of the GAO study specious.
And recently the OECD reported that the US had the second highest tax rate (39.25%) if its 30 member nations. The US rate, by the way, was 13 points higher than the average rate of the OECD nations.
Lefties are again using corporations (the job creators) as scapegoats.
There’s just something about making the cooks eat what they are serving up…….
YOu do get to take the mileage as a 1099 if you are subcontracting as a business expense. Also, if you are subcontract thru acompany and they have control of where you go to your job each day – and not you – you get to take the mileage as a 1099. Its all in the language of the contract…never write your own contract or negotiate it until you understand the Federal and State Tax laws – an accountant should be able to advise you on what you can deduct -before you sign up to do the contracting job…
What is misleading is the idea that businesses pay taxes at all. They are merely tax collectors and taxes are a fixed cost to business they pass on to consumers. If they get too high, they move to other countries. Businesses should not be in the tax collecting busy and government should do its dirty work itself through a sales tax alone, which will also do the least harm to an economy. I recommend the work of Kevin Price at http://www.BizPlusBlog.com.
I just wish small business owners would learn to arrange their affairs so that they minimize their taxes also. Did you see the story about Google saving $3.1billion in taxes by sending their income to the Netherlands and Bermuda? I can’t blame them because who wants to pay taxes anyway? But I think the problem is small business owners don’t understand there are ways they can be just as savvy as Google and come out ahead too.