Image source: Social Security Administration.

As we approach the end of the calendar year, a couple of things might come to mind: Halloween, Thanksgiving, and the holiday season, for instance. But it's also time to start thinking about the dreaded "T" word: taxes.

The tax debate rages on
There aren't too many (if any) people I know who like paying federal and/or state taxes. However, taxes are a necessarily evil that help fund all sorts of programs for the federal, state, and local governments. Of course, the big debate that's been raging for as long as I can remember is who should pay the most in taxes, and how much should that individual or business have to pay as a percentage of their annual wages or income.

A case could obviously be made that higher income individuals and corporations should pay more in taxes because they make more and can therefore afford it. This money can then be funneled through federal and state government channels and wind up being used to do everything from creating jobs to updating infrastructure and maintaining the education system.

Yet a flipside to the above case can also be presented. It's also possible that taxing the wealthy and businesses at a lower rate could spur investment back into local and state projects, which also create jobs and help spur the economy. This has been especially true of corporations, which have on numerous occasions in the past threatened to move jobs overseas in order to escape high U.S. corporate tax rates.

Image source: Flickr user DigBoston.

Corporate taxes take center stage
According to data compiled by KPMG, the U.S. has the second-highest top-tier corporate marginal tax rate in the world, at 40%. It trails only the United Arab Emirates and its 55% corporate marginal tax rate. Although the United States offers a very lucrative opportunity for businesses to grow given the country's high standard of living and free-spending consumers, high corporate tax rates can dissuade investments.

Within the last few years we've witnessed quite an interesting response to high corporate tax rates in the United States. Known as tax inversions, larger companies have been purchasing smaller but somewhat similar-sized companies in tax-friendlier countries, then moving their headquarters overseas to the new country. Medtronic did this when it purchased Covidien last year, moving from a top-marginal tax rate of 40% in the U.S. to a tax rate of 12.5% in Ireland where Covidien was headquartered.

You may have also caught wind of U.S. multinationals keeping their international profits overseas so as not to pay tax on repatriating their income. Congress has done its best to discourage the practice of tax inversions and hoarding income outside the United States, but it's obvious that consumers and businesses will do what they can within the confines of the law to lower their effective tax rates.

Image source: Flickr user ProgressOhio.

You mad bro? These companies may pay lower tax rates than you
Admittedly, the U.S. tax code isn't the easiest to understand at times. In fact, it's the equivalent of 3.8 million words long, which is enough to make anyone cringe. However, some companies in 2014 were able to use the tax code to their advantage, both in the U.S. and in overseas markets, to pay an overall tax rate that may have been lower than yours!

According to a report released this past week by WalletHub, the average overall tax rate paid by S&P 100 companies (the 100 leading, and often largest, companies within the S&P 500) in 2014 was 28.4%. Based solely on U.S. federal tax rates, S&P 100 companies were taxed about 3% higher than what the top 3% of individual income earners paid in 2014.

But quite a few very large companies managed to pay well below the 28.4% average tax rate for S&P 100 companies in 2014. In fact, with the average tax rate across all Americans believed to be 10.1% based on estimates from the U.S. Congress's Joint Committee on Taxation, it's possible a couple large- and megacap stocks actually paid lower tax rates than you! And lower tax rates mean companies get to keep more of their profits, potentially resulting in more attractive valuations.

Image source: Flickr user Mark Moz.

Morgan Stanley (NYSE:MS): negative 2.5% overall tax rate
No, your eyes aren't deceiving you. After generating in the neighborhood of $34 billion in revenue in 2014 and annual diluted EPS of $2.96 per share, Morgan Stanley was actually due a net tax refund for the full year.

Despite paying an above-average 28.9% tax rate in international markets (the S&P 100 average in overseas markets is 24.8%), Morgan Stanley netted a negative 44.9% tax rate within the United States. The primary culprit was the legal entity restructuring of Morgan Stanley Smith Barney Holdings from a partnership to a corporation, which changed the tax status of MSSBH and led to a net discrete tax benefit of $1.4 billion. For the full year Morgan Stanley recognized $2.2 billion in net discrete tax benefits. It's unlikely Morgan Stanley will replicate this exceptionally low tax rate (or should I say refund?) again next year.

Amgen (NASDAQ:AMGN): 7.6% overall tax rate
Amgen, the original biotech blue-chip stock, offers one of the lowest overall tax rates in spite of its $20.1 billion in sales and $8.5 billion in adjusted income reported in 2014.

Image source: Amgen via Flickr.

How on Earth did Amgen manage to pull off such an absurdly low tax rate after earning $8.5 billion? You can point your finger at the extension of the Research & Development Tax Credit in 2014. R&D expenses are typically viewed as capital expenses, but the R&D tax credit allows a business to deduct its R&D expenditures in the current tax year, or to amortize them over 60 months. Most drug developers choose to do the former. The result for Amgen was a substantial tax benefit of $109 million in the fourth quarter.

At the beginning of the year Amgen guided toward a higher adjusted tax rate of 18%-19% in 2015, which doesn't include the benefits of the R&D Tax Credit. If Congress chooses to extend the credit for a 17th straight year, Amgen's adjusted tax rate estimate will likely drop in 2015 from its initial guidance of 18%-19%.

General Electric (NYSE:GE): 10.3% overall tax rate
Conglomerate General Electric also makes the list of lowest overall tax rate thanks in part to its negative federal and state income tax rates. Its international tax rate of 18% was also nicely below the S&P 100 average.


Image source: General Electric.

So, how exactly does a company that generated $148.6 billion in revenue and $16.7 billion in profits last year only wind up paying an overall tax rate on par with that of the average American? Part of it is tied to the fact that GE generates a significant amount of profits offshore in lower tax environments. However, GE also recognizes tax benefits that aren't always broken down to individual components for investors. These could include R&D expenses and losses related to its GE Capital arm.

GE is such a large company that understanding the intricacies of its tax structure isn't always easy, but its eventual GE Capital spinoff could help make things more transparent for Wall Street and investors.

A low tax rate can certainly be beneficial when it comes to boosting a company's bottom-line, and it can make it appear more attractive on a valuation basis; but a low tax rate shouldn't be the only tool you use when determining whether or not to invest in a stock. Consider WalletHub's report just another of many key puzzle pieces that you can use when determining whether a company is worth adding to your investment portfolio.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of General Electric and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.