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A tweet by President Biden on October 20, 2021, got my attention: "Here's the deal: If you spent $3 on your coffee this morning, that's more than what 55 major corporations paid in taxes in recent years." The president has used this statistic in speeches or interviews 10 times since April, when the Washington Post ran a story headlined, "Dozens of America's biggest businesses paid no federal income tax—again."
If your immediate reaction is outrage, you are in good company.
Scores of politicians around the nation are also requoting this statistic as evidence that we need to immediately pass punishing legislation raising taxes on these U.S. corporations that are avoiding paying their “fair” share of taxes on their profits because of legal, but unfair, manipulation of the tax code afforded only to wealthy corporations. The thought that average taxpayers are paying more in taxes than some of America’s largest corporations screams of corruption and unfairness.
These headlines are not new. In 2019, the Center for Public Integrity reported, "At least 60 companies reported that their 2018 federal tax rates amounted to effectively zero, or even less than zero."
How do those companies get away with this?
First, while the headlines may give the impression that the same corporations chronically pay no taxes, year after year, an investigation shows this is not the case. According to an article, "10 Common Tax Myths, Debunked," from the Tax Foundation, "It’s true that in some years, certain corporations, often those that appear profitable, pay zero federal income taxes. That’s not due to any tricks or 'loopholes' though. There are several legitimate reasons why a 'profitable' corporation should not pay income taxes."
My research found these companies apply legal incentives to reduce taxes that encourage capital investment into the U.S. economy. These incentives are also available to most small businesses in the U.S. These techniques are not secrets, evasions, or sleight of hand. They were intentionally included in the tax code to encourage businesses to invest in capital improvements and provide jobs to the economy.
Here is how some of those incentives work:
1. Businesses that reinvest their profits in equipment and buildings can deduct a portion of these expenses.
2. Businesses receive tax credits for spending on research and development. Such credits are incentives to help offset the high risk of the up-front costs of developing new ideas, not all of which pay off.
3. Some employees may be partially compensated with company stock rather than cash. While still a real cost to the company, this incentive minimizes cash outflows while giving employees an opportunity to reap the rewards of their hard work in future profits.
4. If companies lose money in some years, the tax code allows them to spread out the impact of those setbacks by carrying the losses over into future years to offset profits, temporarily paying "no taxes" until the annual profits offset the past losses.
I have seen many owners of small businesses use these same incentives, particularly carrying forward losses that result from essential start-up costs. The corporate tax code generally applies equally to all businesses. It is meant to encourage small companies as well as large ones to take the risks necessary to create new jobs.
As with any headlines or sound bites from political figures, it's a good idea to dig deeper before you respond with outrage. Many statements are true but incomplete, meant to forward an agenda or attract attention. A healthy dose of skepticism and objective fact-checking of statements will help all of us maintain a balanced view of reality.
Rick Kahler, MS, CFP®, CFT-I™, ChFC, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
