Taxation in the real world: How Snap is ghosting the IRS
Snap Inc. (SNAP -1.75%) is no stranger to clever tax strategies. Many tech companies rely on stock-based compensation, but few can match Snap's dedication to this strategy.
Stock-based compensation is a helpful tool for companies wanting to lower their tax bills. Instead of more cash in each paycheck, workers get bonuses and part of their ordinary pay issued in the form of company stock or stock options. The stock-based compensation counts as a tax-deductible business expense -- just like a larger paycheck would -- and lowers the corporate tax bill.
It works particularly well for fast-growing market darlings, whose rising stock prices can motivate top-quality talent to join the workforce and stick around for the long haul.
According to data collected by Blind, an app that lets tech workers anonymously report and compare salaries across the industry, stock awards account for 46% of the average Snap worker's compensation.
The strategy is making a difference. In 2023, the company behind the Snapchat social media platform reported a loss before income taxes of $1.29 billion and an income tax expense of $28.1 million. That's all under generally accepted accounting principles (GAAP), which is how you calculate taxable income and report it to the IRS.
At the same time, Snap posted an adjusted net profit of $0.09 per share. You might be scratching your head, but here's the kicker: Snap's secret weapon is $1.32 billion of stock-based compensation.
Without the deduction, Snap would have been on the hook for a much larger tax payment. The financial engineering of stock-based compensation not only reduces the taxable income but also ensures that key employees are rewarded in a way that aligns their interests with the company's performance.