Microsoft’s latest annual financial report shows the company achieved record profitability while it avoided federal income tax on almost all of its U.S. income for fiscal year 2026. The company’s 2.44 percent federal tax rate on over $100 billion of U.S. income is largely attributable to tax breaks that were either created or expanded by Republican tax cuts enacted at the behest of President Donald Trump in 2017 and 2025.
Microsoft’s $101 billion of pretax U.S. income dwarfs its previous all-time high of $65 billion, recorded the previous year. And instead of paying $21 billion of current federal income tax, as the 21 percent statutory federal income tax rate should require, Microsoft reports just $2.46 billion of current federal tax. That’s an effective federal income tax rate of 2.44 percent. This means the company reduced its federal income taxes by $18.7 billion last year.
Fully two-thirds of the company’s tax breaks last year are due to one provision, accelerated depreciation. This tax break was turbocharged by the “bonus depreciation” measure passed initially by Congressional Republicans and President Trump in 2017 and made permanent by Republicans as part of Trump’s 2025 corporate tax cuts.
While Microsoft does not disclose how much of these depreciation tax breaks are tied to its AI investments, there is no doubt that many are tied to new data centers, chips, servers, and other such property. This all comes at a time when many workers are being displaced due to advancing AI capabilities, and when Microsoft itself is laying off thousands of workers.
The other one-third of Microsoft’s 2025 tax breaks are due to a mix of new and old tax provisions. The R&D expensing provision pushed through by Congress last year saved Microsoft $1.5 billion, and R&D credits reduced its income taxes by close to $1.5 billion as well. The “Foreign Derived Intangible Income” deduction created by the 2017 Trump tax cuts saved the company $600 million.
Thanks to the new detailed disclosure requirements implemented by the Financial Accounting Standards Board earlier this year, Microsoft is forced to disclose that it reduced its worldwide tax rate by 2.6 percent last year by booking income in Ireland. Its Irish tax savings of $4.3 billion come as little surprise in the wake of the company’s new EU tax disclosure, which shows the company booked 38 percent of its worldwide income in Ireland in 2025 despite having only 3 percent of its employees there.
Microsoft also appears intent on continuing to conceal its use of a dizzying array of offshore subsidiaries from its shareholders. As it did in its fiscal 2025 annual report a year ago, the company disclosed the existence of only eight subsidiaries worldwide. But the company’s initial filing under the European Union’s new “country by country” reporting requirement, submitted less than one month ago in accordance with the new EU rules, identifies 201 subsidiaries, 193 more than are acknowledged in Microsoft’s new report to shareholders. Among the 193 subs that appear to have slipped Microsoft’s mind are 19 Irish companies, six in Luxembourg, eight in Malta, 21 in the Netherlands and one each in Cyprus and Trinidad and Tobago, all known tax havens.
