Corporate Tax Avoidance Under the Tax Cuts and Jobs Act
report
Thirty-nine profitable corporations in the S&P 500 or Fortune 500 paid no federal income tax from 2018 through 2020, the first three years that the Tax Cuts and Jobs Act (TCJA) was in effect. The 39 corporations were profitable in each of those three years and, as a group, reported to shareholders that they had generated $122 billion in profits during that period. Some of these companies paid federal income taxes in one or two of these years, but their total federal income taxes for the three-year period were either $0 or a negative amount, meaning they received a refund from the IRS for taxes paid in previous years.
A report published by ITEP in April identified 55 corporations that were profitable in 2020 but did not pay federal income taxes for that year.[1] This report expands on that analysis, finding corporate tax avoidance under our current tax laws is a long-term problem that is not unique to any particular year. Several companies appear in both reports because they avoided taxes in both 2020 and over the three-year period, including, for example, Archer Daniels Midland, Booz Allen Hamilton, DISH Network, Duke Energy, FedEx and Salesforce.[2]
Among the 39 corporations that avoided paying federal income taxes over three years, T-Mobile reported the largest profits. It reported $11.5 billion in profits over this time but had a federal income tax liability of negative $80 million, meaning the company received $80 million in tax refunds.
Besides the 39 companies that paid nothing over three years, an additional 73 profitable corporations paid less than half the statutory corporate income tax rate of 21 percent established under TCJA. As a group, these 73 corporations paid an effective federal income tax rate of just 5.3 percent during these three years, meaning they paid federal income taxes equal to just 5.3 percent of their profits.
Among the 73 corporations that paid less than half of the statutory rate are household names such as Amazon, Bank of America, Deere, Domino’s Pizza, Etsy, General Motors, Honeywell, Molson Coors, Motorola, Netflix, Nike, Verizon, Walt Disney, Whirlpool and Xerox—which all paid effective federal income tax rates in the single digits.
Tables 1 and 2 below illustrate the 39 corporations that paid nothing over three years and the 73 corporations that paid less than half the statutory corporate tax rate over three years. The appendices include more detailed tables that show what each corporation reported that it earned in profits and paid in federal income taxes for each year.
When lawmakers allow corporations to avoid taxes, the costs to the United States are enormous. Because the statutory income tax rate for corporations is 21 percent, the total tax breaks a corporation receives is simply 21 percent of its profits minus what it paid. The 39 corporations that paid nothing over three years received $29.7 billion in corporate income tax breaks during that period. In other words, if these companies had paid 21 percent of their profits and received no refunds from the IRS, they would have paid $29.7 billion more than they did.
The 73 corporations that paid less than half the statutory corporate tax rate over three years received a combined $67.5 billion in corporate income tax breaks during that time. This amount is 21 percent of their profits, minus what they paid.
Background
In April, ITEP identified 55 corporations belonging to either the S&P 500 or Fortune 500 that reported earning profits in 2020 but also reported paying no federal income taxes that year.[3]
During his address to Congress on April 28, President Biden mentioned this finding as he argued for reforming the nation’s corporate income tax laws.[4] He said:
“A recent study shows that 55 of the nation's biggest corporations paid zero in federal income tax last year. No federal taxes on more than $40 billion in profits. That's not right. We're going to reform corporate taxes.”
Focusing on a single year provides many insights but, of course, we can learn even more by following corporations’ tax liability over time. Some tax experts have pointed out that the tax system is designed to require businesses to pay a reasonable share of their profits in taxes over several years, even if they pay little or nothing in one particular year. Lily Batchelder, who was recently nominated to serve as the Assistant Treasury Secretary for Tax Policy, recently said during a Senate hearing, “I find it helpful to look at what it is individuals or companies are paying over time rather than a one-year snapshot.”[5]
For example, consider a company with losses in one year and profits over the next two years. The losses in one year become a tax benefit in profitable years. The company can carry a portion of the losses forward into each of the two profitable years, reducing the taxable income that the company reports to the IRS during those years. If the rules work properly, the company will pay a reasonable amount of taxes over the three-year period compared to its profits.
But this report demonstrates that the current rules often do not work properly. Many corporations were profitable for each of the previous three years and yet they did not pay a reasonable amount of taxes compared to their profits during that period.
This analysis is based on the information that publicly traded corporations report to shareholders and potential investors in the 10-K that they submit annually to the Securities and Exchange Commission (SEC). It uses the profits that companies report in their 10-K, as well as the “current” federal income tax they report for the year, which is their best estimate of the corporate federal income tax they will pay for the year.
Some observers have suggested that there are innocuous reasons why the profits a company reports on a 10-K may deviate from the profits it reports to the IRS. This could happen, for example, because the company’s fiscal year covered in the 10-K may differ from its tax year.[6] However, this report demonstrates that even corporations that report profits three years in a row avoid paying federal income taxes during that period, making it impossible to believe that these companies pay enough taxes.
How Corporations Avoid Taxes
The tax avoidance illustrated in this analysis is mainly the result of provisions enacted by Congress. Lawmakers often justify these provisions as necessary to achieve some important goal, but they seem to accomplish little beyond reducing tax revenue that could pay for public investments.
Accelerated Depreciation
For example, provisions for accelerated depreciation allow companies to write off the costs of investments in equipment more quickly than the equipment wears out and loses value. The most likely outcome is that this rewards companies for making investments they would have made absent any tax break.[7] The Tax Cuts and Jobs Act allows companies to immediately write off the full costs of investments, which is the most extreme version of accelerated depreciation.
During the period covered by this report, Amazon saved $4.8 billion through accelerated depreciation while Walt Disney saved $3.9 billion and Verizon saved $2.1 billion. General Motors saved $1.3 billion in this way and FedEx saved $1.1 billion.
In theory, accelerated depreciation is merely a shift in the timing of tax payments. Deductions that would otherwise be taken later are taken now, and taxes that would otherwise be paid now are paid later. But companies that continue to take advantage of accelerated depreciation can make this benefit last a very long time or indefinitely and essentially enjoy interest-free loans from the IRS.
Stock Options
Some companies reduce their taxes by using a break for stock options that they typically pay to their executives. This tax break allows companies to write off stock-option related expenses for tax purposes that go far beyond expenses they report to investors.[8]
For example, the tax savings that Salesforce.com, Amazon and Molson Coors report that they obtain from stock options accounted for more than 60 percent of their total tax breaks over the 2018-2020 period.
Tax Credits
Tax breaks for stock options and accelerated depreciation allow companies to report smaller profits to the IRS than they report to shareholders and potential investors in their 10-K. In some cases, corporations may simply pay 21 percent of the profits they report to the IRS as federal income taxes. But many corporations use tax credits to further reduce their tax liability.
The most significant tax credit is the research and development (R&D) tax credit, which is supposed to encourage innovation but probably rewards companies for research they would have conducted in the absence of any tax break.
Most corporations do not explain in their 10-K how much they save specifically through the R&D tax credit, but some do. For example, Nike reports $160 million in tax savings during these three years from the R&D credit, which comes to 10 percent of its tax breaks. Netflix reports that it saved $389 million from the credit, which comes to 36 percent of its tax breaks. No one would object to Nike investing its own money in research to learn how to make more comfortable shoes or Netflix investing its own money to create new ways to entertain us. But it is another question entirely whether that research should be subsidized through the tax code.
Offshore Profit-Shifting
Another likely explanation of the tax avoidance we identify is offshore profit-shifting. The analysis in this report is based on the U.S. federal income taxes that companies pay on the profits they report (to shareholders and potential investors) having earned in the United States. However, it is possible that some of these profits are reported quite differently to the IRS.
Corporations can use convoluted accounting schemes to make the profits they earn in the United States appear to be earned in countries like Ireland, which has a very low corporate tax rate, or countries like Bermuda and the Cayman Islands, which have no corporate tax.
The drafters of the Tax Cuts and Jobs Act (TCJA) passed up an opportunity to stop American corporations from shifting profits in this way to offshore tax havens.[9] For example, many or most of the profits that American corporations report earning through their offshore subsidiaries are not subject to U.S. taxes at all. When they are, the tax rate they pay does not exceed 10.5 percent, just half of the rate that applies to domestic profits under the TCJA.
How Proposals from the Biden Administration Would Address Corporate Tax Avoidance
President Biden has proposed to raise the statutory federal corporate income tax rate from 21 percent to 28 percent and end or limit many of the breaks that allow corporations to avoid taxes.
For example, all profits that American corporations report that they earn through their offshore subsidiaries would be subject to a combined worldwide rate of 21 percent. This means that if an American corporation reports foreign profits that are taxed at a rate of less than 21 percent by the relevant foreign government, the United States would impose a tax equal to the difference.
Congress could also directly repeal or limit the other tax breaks described here (accelerated depreciation, the stock options tax break, and the research and development credit). President Biden’s tax plan does not address these tax breaks directly, but it does propose to limit some breaks for the largest corporations by imposing a minimum tax equal to 15 percent of the profits that a company reports to shareholders and potential investors.
The President’s proposed minimum tax would only apply to corporations with income of more than $2 billion in a given year. Corporations would be required to pay whatever is greater, their tax liability under the normal rules, or 15 percent of their “book” income, which is the profits they report on their 10-K.
While Congress could go much further, these reforms could dramatically limit the most significant corporate tax avoidance that our analyses have identified.
Another ITEP report published in April provides more detail about why corporate tax avoidance occurs and what Congress can do about it.[10]
Appendices
Appendix I: 39 Corporations Avoided Federal Income Tax from 2018 through 2020: MORE DETAIL
Appendix II: 73 Corporations Paid Less than Half the Statutory Corporate Income Tax Rate from 2018 through 2020: MORE DETAIL
Endnotes
[1] Matthew Gardner and Steve Wamhoff, “55 Corporations Paid $0 in Federal Taxes on 2020 Profits,” Institute on Taxation and Economic Policy, April 2, 2021. https://itep.org/55-profitable-corporations-zero-corporate-tax/
[2] Our report identifying 55 corporate nonpayers in 2020 also identified 26 that paid nothing over three years, but this was a subset of the 55 companies that paid nothing in 2020. In this report we find that a total of 39 corporations were profitable in each of those three years but paid no federal income taxes over that three-year period. This includes the 26 corporations that also did not pay federal income taxes in 2020 but it also includes additional corporations that did pay in 2020 but nonetheless saw their combined tax liability over the three-year period sum up to zero dollars or less.
[3] Matthew Gardner and Steve Wamhoff, “55 Corporations Paid $0 in Federal Taxes on 2020 Profits,” Institute on Taxation and Economic Policy, April 2, 2021. https://itep.org/55-profitable-corporations-zero-corporate-tax/
[4] Craig Harris, “Biden Cites Left-Leaning Study that 55 of Top U.S. Companies Paid No Federal Income Taxes,” USA Today, February 29, updated May 1, 2021. https://www.usatoday.com/story/money/2021/04/29/president-biden-cites-study-saying-55-big-u-s-firms-paid-no-fed-taxes/4889916001/
[5] Senate Committee on Finance, Hearing to Consider the Pending Nominations of Lily Lawrence Batchelder to be an Assistant Secretary of the Treasury, Benjamin Harris to be an Assistant Secretary of the Treasury, J. Nellie Liang to be an Under Secretary of the Treasury, and Jonathan Davidson to be Deputy Under Secretary of the Treasury, May 25, 2021 (at 1:21:16). https://www.finance.senate.gov/hearings/hearing-to-consider-the-pending-nominations-of-lily-lawrence-batchelder-to-be-an-assistant-secretary-of-the-treasury-benjamin-harris-to-be-an-assistant-secretary-of-the-treasury-j-nellie-liang-to-be-an-under-secretary-of-the-treasury-and-jonathan-davidson-to-be-deputy-under-secretary-of-the-treasury
[6] For example, see comments from Douglas Holtz-Eakin in Louis Jacobson, “Fact-Checking Joe Biden on How Little Some Corporations Pay in Taxes,” PolitiFact, April 12, 2021. https://www.politifact.com/factchecks/2021/apr/12/joe-biden/fact-checking-joe-biden-corporation-taxes/
[7] Steve Wamhoff and Richard Phillips, “The Failure of Expensing and Other Depreciation Tax Breaks,” November 19, 2018, Institute on Taxation and Economic Policy. https://itep.org/the-failure-of-expensing-and-other-depreciation-tax-breaks/
[8] Elise Bean, Matthew Gardner and Steve Wamhoff, “How Congress Can Stop Corporations from Using Stock Options to Dodge Taxes,” December 10, 2019, Institute on Taxation and Economic Policy. https://itep.org/how-congress-can-stop-corporations-from-using-stock-options-to-dodge-taxes/
[9] Steve Wamhoff, ”The New International Corporate Tax Rules: Problems and Solutions,” June 6, 2018, Institute on Taxation and Economic Policy. https://itep.org/the-new-international-corporate-tax-rules-problems-and-solutions/
[10] Amy Hanauer, ”Corporate Tax Reform in the Wake of the Pandemic,“ April 2, 2021, Institute on Taxation and Economic Policy. https://itep.org/corporate-tax-reform-in-the-wake-of-the-pandemic/