You may feel like a champion financial planner after filing last year’s income taxes, even though you did pay a hefty fee to an accountant or some tax software. But don’t even think about beating Amazon, which paid a whopping $0 in federal taxes last year—despite earning $11.2 billion in U.S. profits—according to a report from the Institute on Taxation and Economic Policy (ITEP) last week.
Even better (for Amazon), it actually claimed $129 million in federal income tax rebates in 2018. In percentage terms, that works out to an effective tax rate of -1.2 percent for the e-commerce giant, instead of the statutory 21 percent corporate income tax rate under the new Tax Cuts and Jobs Act (TCJA), which took effect last year.
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“If you paid the $119 annual fee to become an Amazon Prime member, you paid more to Amazon than it paid in taxes,” Senator Bernie Sanders mocked the e-commerce giant in a tweet last Thursday.
Believe it or not, it was actually the second year in a row that Amazon managed to avoid any federal income tax. In 2017, the company also paid nothing on its $5.6 billion U.S. profits and claimed a tax return of $140 million. But the most upsetting and confusing part of all of this is probably the fact that no one—except Amazon’s own accountants, of course—seems to have a clue as to how Amazon was able to do that.
“It’s hard to know exactly what they’re doing,” Steve Wamhoff, ITEP’s director of federal tax policy, told Yahoo Finance. “In their public documents, they don’t lay out their tax strategy. So it’s unclear exactly which breaks [they are taking advantage of]. They vaguely say tax credits… The thing we would need to know is would they have had positive corporate income tax liability were it not for TCJA? Maybe. It’s hard to tell.”
In response to the ITEP report, Amazon said the tax credits applied in 2018’s filing included capital depreciation and research and development (R&D) investment credits. Tax break for employee stock options also played a big role in lowering its effective tax rate. In 2018, stock options were applied for employees of all levels, the company said, so the tax deduction from vested share values resulted in larger tax savings than previous years.
More specifically, a big chunk of the tax savings could come from what’s called the “bonus depreciation” under the TCJA, Paul Gevertzman, a tax partner at New York-based accounting firm Anchin, told Observer.
Under the capital depreciation rule prior to the TCJA, companies were allowed to write off up to 50 percent on qualified expenses, such as equipment purchases or new facility construction, Gevertzman explained. The tax-exempt portion was 50 percent in 2017 and was scheduled to gradually phase out in 2018 and 2019. But last year’s tax reform overrode these schedules and allowed companies to write off 100 percent of qualified expenses in the first year.
Per Amazon’s own disclosure in its annual report, the company’s federal tax credits last year were “primarily related to the U.S. federal research and development credit.” Although R&D credits have been around long before the TCJA came along, a tax law change last year greatly affected how these tax credits could be used.
The TCJA eliminated the alternative minimum tax for corporations, a system in which companies were required to pay at least some amount of taxes—no matter how many tax breaks they were entitled to. For this reason, many companies would keep their R&D deductions off tax filings when they couldn’t reduce the final taxes below the alternative minimum tax.
But without this limit starting in 2018, companies were allowed to carry over previous years’ unused R&D credits for up to 20 years. “Amazon probably used the R&D credits that they had banked for years and years. That could be a huge number freed up because of the law changes last year,” Gevertzman said.
To be fair, that’s not to say that Amazon has never paid taxes. In fact, before 2017, the company paid federal income taxes fairly consistently. According a 2017 analysis by The New York Times, Amazon paid an average annual tax rate of 13 percent—covering federal, state, local and international—between 2007 and 2015. Still, that rate fell below the average rate of 26.9 percent among S&P 500 companies.
“Amazon pays all the taxes we are required to pay in the U.S. and every country where we operate, including paying $2.6 billion in corporate tax and reporting $3.4 billion in tax expense over the last three years,” an Amazon spokesperson said in a statement to Observer.
Correction: This article is updated with Amazon’s comment on ITEP’s findings.