Every year, taxpayers get angry when they discover that high-profile companies have found ways to zero out their tax bills for the year. In the early 2010s, industrial behemoths like General Electric (NYSE:GE) and Boeing found themselves in the crosshairs of public criticism for paying zero tax, while today, Amazon.com (NASDAQ:AMZN) is in the same boat. Such stories always create controversy because individual taxpayers don't have the same latitude to find as many tax-saving measures as corporate taxpayers apparently have.
It's easy to criticize big corporations for finding ways to reduce or eliminate their tax bills. But companies are only doing what you or anyone else does when filing their taxes: finding the best way to pay as little in tax as is legally possible. In that light, the real culprits for allowing big businesses to pay nothing in taxes are the lawmakers who enact the provisions that make it possible.
How companies zero out their tax bills
Before passing judgment on companies for paying little or no tax, it's always important to put a single year in context. In the case of General Electric and other companies with financial exposure in the late 2000s, the biggest contributing factor to paying zero tax was the fact that these companies actually posted huge losses. GE is best known for its industrial and consumer products, but the company's GE Capital finance arm lost billions during the financial crisis. By offsetting income from its profitable divisions with losses from GE Capital, General Electric avoided tax in certain years -- but it's not as though the company benefited from the actual losses it suffered.
In other cases, timing becomes a key factor. For an industrial giant like Boeing, tax provisions often allow accelerated depreciation, or immediate expensing of certain investments in its business, and that can artificially depress taxes due in certain years. Later on, the fact that a company got to claim those deductions faster than it otherwise would have catches up with it, and taxes in later years are higher than they would've been under normal tax rules.
Companies can also take advantage of losses earlier in their corporate histories to offset gains later on. Amazon is benefiting from net operating losses that it accumulated in past years. When you combine that with the tax breaks for depreciation and expensing as well as a number of federal tax credits tied to some of its capital investment programs, the e-commerce giant's tax bill could get eliminated despite posting substantial profits over the past year.
Hidden tax breaks are easier for lawmakers to give away
Debate over the tax preference for big businesses reached a height during the run-up to tax reform becoming law. The cut in corporate tax rates from 35% to 21% was much larger than the one to four percentage point reductions in income tax bracket rates for individual taxpayers. Moreover, unlike the temporary nature of individual tax cuts, tax reform slashed corporate taxes permanently.
Yet many of the provisions that make it easiest for companies to reduce or eliminate their tax bills don't get nearly as much attention. Often, it's an industry-specific tax break that can make a huge difference for a small but significant number of businesses. Whether it's research and development credits for pharmaceutical and technology companies, ethanol fuel credits for agriculture and energy businesses, or low-income housing credits for real-estate developers, you'll find a host of targeted tax deductions and credits that often make their way through Congress and the White House quietly but effectively.
Make your lawmakers smarter
The best way to educate your elected representatives is to communicate with them. Letting your senator or congressional representative know that tax breaks don't always achieve their intended social purpose will help them understand that they need to make legislation clearer about the trade-offs involved with getting tax credits or deductions. For instance, if lawmakers had tied reductions in corporate taxes directly with desirable actions like employee hiring or capital spending on certain specific expenditures, fewer people would have opposed tax reform.
Large businesses aren't afraid to communicate with elected officials to get what's good for them. If you're offended by that, don't blame the business -- blame the lawmakers who let it happen, and hold them accountable for their actions.