Amazon’s Use of Common Federal Tax Breaks to Eliminate its Federal Tax Bill

January 11, 2020 Published by

The fact that Amazon paid no federal tax in 2018 made national news last year, but one aspect of the story that has been little noticed here in the Bay Area is how the federal tax breaks the company used to wipe out its federal tax bill likely benefited our local economy. The company has not made its returns public, but the expansion of its operations and cities like San Francisco, Palo Alto and Fremont in recent years probably drove at least some of the company’s tax savings.

A lot of people outside the Bay Area (and even some who live here) are surprised to learn that Amazon has a significant presence here, with some media outlets reporting that it employs as many as 7,000 in white-collar occupations, primarily software and hardware design. That is approximately one-third of the company’s North American workforce outside of the Seattle area. In addition to its white-collar workforce, the company operates a major fulfillment center in Fremont

Corporate Tax Laws Favorable to Amazon

While some of the American public is upset that one of the world’s largest corporations paid no federal tax in 2018, Amazon simply took advantage of several longstanding provisions in the tax code that benefit corporations. The company is also likely to have utilized a temporary deduction provided in the 2017 Tax Cuts and Jobs Act allowing for accelerated depreciation on capital investments. Regardless of how one feels about Amazon’s tax bills, it provides a great example of the beneficial tax benefits the US tax system affords corporations.

That said, Amazon’s startlingly low tax bill was also the result of several factors that are almost unique to Amazon as a technology-focused company that has spent freely in building IT infrastructure as well as large physical fulfillment and shipping hubs while generating surprisingly small profits. Indeed, the company barely turned a profit until 2016, before generating profits of $3 billion in 2017 and $10.1 billion in 2018. And, while those profits seem significant, they are small when compared to Amazon’s product sales of $178 billion in 2017 and $233 billion in 2018.

Amazon Likely Used Losses and Spending to Offset Taxes Owed

The first beneficial corporate tax provision the company is likely to have utilized are net operating loss carryforwards from prior tax years when Amazon was losing money. It is estimated that, as of December 31, 2018, Amazon had $627 million in unused net operating loss carryforwards available to apply to future tax years.

Next, Amazon is reported to have spent $29 billion on research and development for 2018, which allowed it to take advantage of the R&D tax credit intended to spur US-based research. While it is unclear how much of the R&D expenses qualified for the credit (some have estimated that the amount could have been as high as $419 million), it is likely Amazon took full advantage of those that did. The credits must be used to offset taxes owed and if the company could not take full advantage of the credits it had available it can carry them forward for up to 20 years to offset future taxes. The 20-year carryforward also makes it likely that the company took advantage of R&D credits accrued in previous tax years in 2018.

It is also likely that Amazon utilized a provision in the Tax Cuts and Jobs act which offered corporate taxpayers a temporarily expanded write-off for capital investments until 2023. That provision allows companies to claim a 100 percent deduction based on the purchase price of equipment in the year it was purchased rather than depreciating it, which is a significant benefit for a company that is rapidly expanding its IT infrastructure, warehouses and distribution systems. Typically, the bonus depreciation applies to capital investments with a useful life of 20 years or less, such as software, equipment and machinery.

Stock-Based Compensation Scheme Played a Role

Amazon awards a lot of stock-based compensation to its employees and companies are allowed to deduct the cost of stock-based compensation from their taxable earnings, despite the fact a company does not actually spend any money when doing so. The company is reported to have issued $1.1 billion in stock-based compensation for 2018. Additionally, Amazon’s share price has gone up in recent years and, due to the way share the stock-based compensation deduction is calculated, the size of the deduction increases with the market.

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This post was written by Sean Allaband

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