Facebook Gets a Multibillion-Dollar Tax Break

Facebook Founder and Chief Executive Officer Mark Zuckerberg addresses the TechCrunch Conference

It hasn’t drawn much attention, but Facebook’s first annual earnings report contains an accounting gem: a multibillion-dollar tax deduction for the cost of executive stock options and share awards.

Even though Facebook (FB) reported $1.1 billion in pre-tax profits from U.S. operations in 2012, it will probablypay zero federal and state taxes—and even receive a federal tax refund of about $429 million—according to a Feb. 14 statement from Citizens for Tax Justice.

The tax-research and -lobbying organization says companies such as Facebook should treat stock options the same in their reports to shareholders as they do in their tax filings. Citizens for Tax Justice calls the tax footnotes in Facebook’s Jan. 30 financial statement “an amazing admission,” but there’s nothing illegal about the breaks the company is claiming. Companies like Facebook are allowed to treat the cost of non-cash compensation, such as stock options, as an expense that reduces profits, essentially the way they treat cash compensation such as salaries.

The difference is that Facebook—unlike, say, General Motors (GM)—relies heavily on stock options and restricted stock units as a form of compensation. It paid out a lot during its years as a private company that it must now recognize on its income statement and balance sheet.

You won’t find any $429 million tax refund in Facebook’s financial statements. Indeed, the company says it had a $559 million federal tax liability in 2012. But that liability isn’t an actual payment. In a footnote, the company also said that it had a $1.03 billion “excess tax benefit” last year related to “stock option exercises and other equity awards.” That benefit is what flips the federal tax liability into a refund. (A small portion is applied against state taxes.)

Facebook says that it anticipates reducing its tax liability in the future by an additional $2.17 billion by using further net operating loss carry-forwards that it has banked.

Facebook spokeswoman Ashley Zandy declined to discuss the tax break but pointed to the transcript of Facebook executives’ conference call with analysts. On the call, Chief Financial Officer David Ebersman cited the accumulated tax benefits and noted that the company ended the fiscal year with nearly $10 billion in cash and investments, “giving us great flexibility and risk protection.”

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