Why the $0 Tax Bill?
Amazon has historically been severely unprofitable, but has turned around in recent years and became consistently profitable, reporting nearly $11 billion in earnings last year. But despite the company’s growth, Amazon’s tax bill has decreased. The company paid $0 in corporate income taxes last year.
How They Do It
Amazon has three tricks for reducing the tax bill, and none of them include stashing profits in offshore subsidiaries or declaring itself a foreign entity.
Research & Development
The first ‘trick’ Amazon uses is the Research and Development Credit. The credit was created to encourage profitable companies to spend money on innovation and research for the betterment of mankind. Obviously Amazon does an above average amount of this.
The Tax Cuts and Jobs Act (TCJA) has a provision that allows companies to take a 100% deduction for capital equipment. Every dollar spent on equipment, buildings, improvements, etc. after September 27, 2017 has the option of 100% bonus depreciation at the date of service (Note: assets cannot be foreign). The idea is that the government wants to encourage companies to spend money on infrastructure, which Amazon has done a significant amount of in the past couple years.
The most significant of Amazon’s tax deductions comes from the stock-based compensation that it offers its employees. Even though it doesn’t cost companies any money to hand out shares of their own stock, it is a deduction on the tax return in the amount of the market price of the share. And since Amazon’s stock price has increased so significantly over the past few years, this deduction is substantial. For example, Amazon’s 2018 filing shows approximately $1,000,000,000 in stock based compensation expenses.
The idea that larger, more successful companies should pay higher taxes makes sense logically, but Amazon has good accounting behind their deductions. As a result, Amazon ends up with a lower tax bill.