Amazon: the second biggest employer in America, behind only Walmart. Not only has Amazon elevated Jeff Bezos to the top of the world’s richest people list, but it is also one of the most notorious tax avoiders in American history. In this article, you are going to read how Amazon very legally paid $0 in federal taxes during 2018, and you are going to learn just how dubious its methods are.
Amazon has had a tough start to 2019. Between New York giving Jeff Bezos the boot and Amazon stock is down 20% since last year’s highs, it’s safe to say that Amazon has been playing on the back foot so far. And yet, 2018 was a record year: Amazon more than doubled its profit to $11 billion and more importantly got to pay $0 in income taxes on it.
So How Does Amazon Pay $0 in Income Taxes?
Unsurprisingly, the answer is accounting, and it’s not as complicated or as boring as you might imagine. Amazon, like everyone else, reduces its tax bill by using deductions, but unlike you or me, Amazon has access to much more lucrative deductions that can be grouped in three different categories, some more reasonable than others.
1. Research and Development Tax Credit
The first and cleanest sort of deduction Amazon makes use of is the research and development tax credit, which works in a rather simple manner. Roughly 7% of what Amazon spends on wages and supplies for its R&D; department, they get to claim as a deduction, which makes sense: Congress would love to see America remain a technological superpower and what better way to encourage innovation than by handing out tax deductions.
In 2018 Amazon saved almost one and a half billion dollars thanks to the R&D; credits, but that’s just the start of it.
2. Trump’s Tax Revision
As you know, in 2017, President Trump did his big revision to the US tax code and one of the things he slipped in there is a temporary boost to one form of deductions, specifically depreciation.
Whereas in the past companies had to depreciate (or write off) their property and equipment over many years, usually decades. Trump’s tax revision allows companies to skip this process entirely, getting the full tax benefit from the very start.
In other words, when Amazon builds a new data centre, for example, it gets to claim the full cost of it as a tax deduction now instead of spreading it out over the course of 40 years. Now, this particular provision in the tax code is going to last until 2022, but you can already see the impact it has now: Amazon’s depreciation increased by 40% in 2018.
Unfortunately, it’s not possible to know exactly how much of that new depreciation is motivated by the favourable tax revision, but it’s probably safe to assume that it had at least some effect.
3. Stock-Based Compensation
Now, the final and sleaziest sort of deduction Amazon takes is thanks to its use of stock-based compensation, and it’s a very sneaky one. Do you know how all the big corporations pay their senior employees not in cold, hard cash, but stocks?
Well, they do that not out of the kindness of their hearts or because they’re so concerned about employee ownership, but rather for a much simpler reason: it saves them much money.
You see, when Amazon pays its employees in stock, it gets to deduct the value of the stock it gave just as you would deduct a regular wage. However, there’s a huge issue here because Amazon did not pay anything for the shares it gave out. It didn’t go and buy them off of the market: no, it just created them out of thin air because it can, in the same way, that the Fed can print new dollars.
The ones who pay for this charade are the Amazon stockholders, whose existing shares are worthless because Amazon is constantly creating more of them to pay its employees.
This strategy works, as long as the stock price keeps going up: and the only stock that’s gone up more than Amazon in the past decade is, surprisingly, Domino’s Pizza.
However, in any case, this brilliant strategy not only makes Amazon’s wages effectively free for the company, but it also gives it a huge tax deduction. In 2018, Amazon saved a billion dollars by paying its employees in shares it created for free.
Why Doesn’t Everybody Do This?
After all, the laws that govern Amazon apply to every other company in the same way and the answer is Jeff Bezos; no, the real answer is that most companies struggle to keep their stock price going up without constantly buying back their shares.
Stock buybacks are extremely popular, and Amazon is one of the few companies that doesn’t do them. Most companies first go to the stock market to buy their shares, which increases their price, and then they hand them out to their employees, and it mostly balances out. However, Jeff Bezos skips the buying partly because he’s confident that the stock is going to increase on its own, and indeed it does.
In a way, you can argue that Bezos is the ultimate Wolf of Wall Street because he’s honestly he’s making billions off of this. Moreover, if you’re interested in making billions you should check out How to Create Monopoly article.