How Amazon and Entrepreneurs Can Pay Zero Federal Income Tax, and Do So Legally
Free Book Preview Tax and Legal Playbook
With the recent news that Amazon paid zero federal taxes for 2017, every entrepreneur should be asking, :"How can my company pay no taxes, and legally, too?" According to the Institute on Taxation and Economic Policy, Amazon "paid no U.S. income taxes on $5.6 billion in domestic profits last year." But companies in a position like Amazon's are just doing what the government wants them to do; their action is neither criminal nor evil.
Other companies may be wondering how that no-tax thing works. And, in that case, they may just need more information on how taxes work.
What most people don't realize, in fact, is that 99 percent of the Internal Revenue Code is a series of incentives, primarily for businesses and investors to fuel the economy. There are only about 30 pages in the Code that actually raise revenue; they include charts and tables that tell you how much tax to pay. There is one line that basically declares, "All income is taxable unless we say it isn't," and another that basically says, "No expenses are deductible unless we say they are."
Then, there are about 6,000 pages that tell you how to reduce taxes through tax deductions, tax credits and other incentives.
To learn how to pay no taxes, entrepreneurs should closely review all the things the government wants you to do. All tax incentives refer to specific areas of the economy the government wants to enhance. For example, business owners receive tax incentives to start businesses, invest in research and development, invest in equipment, create new jobs, invest in real estate and give employees stock options. So let's take a look at how Amazon is doing that.
How Amazon reduces its federal tax bill to zero
Amazon paid zero U.S. income tax for 2017, primarily due to its legal action of taking advantage of tax credits and breaks on executive stock options. Here's how Amazon reduced its tax burden to zero, and could even get a refund:
Tax credits. While tax deductions reduce your taxable income, tax credits can directly put money in your pocket at tax time. Amazon receives tax credits for research and development on new products, on services such as Alexa, Amazon Go and on technologies like computer vision. Aaccording to FactSet data reported by Recode, Amazon spent $22.6 billion on R&D in 2017, which is more than any other U.S. company last year (followed by Alphabet, Intel, Microsoft and Apple).
Amazon also receives a lot of tax credits for state and local taxes. For example, Amazon will receive $40 million in tax incentives from Kentucky for building a $1.49 billion air cargo hub attached to the Cincinnati/Northern Kentucky International Airport that will create 600 new jobs.
The top tax credits for small business include the Employer Wage Credit, the Disabled Access Credit, the Child Care Credit, the Work Opportunity Credit, the Small Business Healthcare Tax Credit, the Federal Empowerment Zone Tax Credit, and more. All entrepreneurs should review how these tax credits can attract great employees and reduce their tax bills at the same time.
Stock-based compensation. Amazon also received large tax benefits for compensation to employees in the form of stock. This incentive encourages businesses to share their stock with employees, who ought to benefit from a company's success. This profit-sharing result is what everyone hoped would happen with the reduction in the new corporate tax rates.
Great tax advisor. And it looks like Amazon has a much better tax advisor and tax strategy team than most retailers do. "Between 2008 and September 2017 ... Walmart paid $64 billion in income tax, compared to just $1.4 billion for Amazon," reported USA Today. Amazon also has a credit for its 2017 federal income taxes.
It's important to note that Amazon did pay $957 million in total taxes last year for state and international taxes, according to the company's 2017 annual report. Amazon also collected taxes on products that it sold to customers in the 45 states that have a sales tax.
What many people (such as Senator Bernie Sanders) don't understand is that the government's policies are often carried out through the tax law. Of course, if someone doesn't like a government policy, he or she can do something about it. People can write their members of Congress or, in Senator Sanders's case, actually propose a change to the government's policies from a position of influence.
As Washington, D.C., continues tax-policy debates leading up to the midterm elections, every entrepreneur should be re-evaluating his or her tax strategy. With the new Tax Cuts and Jobs Act of 2017 impacting everyone's 2018 returns, it's even more important to have a great tax advisor who understands how you can legally maximize tax incentives. With the right tax strategy, you can increase your wealth by "making way more money and paying way less taxes."