The U.S. corporate tax rate was cut from 35% to 21%, thanks to the Tax Cuts and Jobs Act (TCJA). The U.S. tax rate is now much more competitive with other nations, but companies are continuously looking for ways to save money.
- The passage of the Tax Cuts and Jobs Act (TCJA) has reduced the corporate tax rate from 35% to 21%.
- Large multinational companies can still save billions of dollars by using foreign subsidiaries and tax havens.
- Other methods used by Fortune 500 companies to reduce taxes include accelerated depreciation and stock options, while some industries even offer specific tax breaks.
The Real Tax Bill
The Institute on Taxation and Economic Policy (ITEP) found in a 2017 report that over the eight-year period from 2008 to 2015, 258 profitable Fortune 500 companies paid an average effective federal income tax rate of 21.2%—while the federal tax rate was 35% for all those years.
Over that same period, 18 companies, including General Electric, International Paper, Priceline.com, and PG&E Corp., avoided paying any federal income tax. The complete list of the 18 corporations is listed below:
A total of 100 companies avoided paying income taxes in at least one year between 2008 and 2015, and their combined pretax income during that period totaled $336 billion.
Yet, instead of paying $118 billion according to the 35% statutory income tax rate, the number of tax breaks applicable to these companies allowed them to earn a negative effective tax rate. That means they earned more in their after-tax income than in their pretax income, often due to tax rebates from the U.S. Treasury.
Companies Paying Even Less Now
Now that the corporate tax rate is reduced to 21%, corporations have found a way to pay even less. The ITEP published an updated report on corporate taxes in December 2019. Per their findings, 379 companies paid an average tax rate of 11% for the tax year.
Ninety-one of those companies, including DowDuPont and Avis Budget Group no federal income tax in 2018. Tax subsidies for the 379 companies totaled $73.9 billion, with Bank of America receiving the largest amount of subsidies at $5.5 billion.
How to Avoid Taxes
There are several ways that corporations avoid paying taxes, or manage to earn tax subsidies.
1. Foreign Subsidiaries
Although the corporate tax rate has been reduced, companies are still using tax loopholes to save money. This includes finding ways to shift U.S. profits to foreign subsidiaries in countries with lower tax rates, a practice known as an offshore tax-shelter.
The TCJA leaves open offshoring incentives for companies to save on taxes. Companies do not have to pay taxes on income earned abroad until that income is repatriated from abroad. That tax, however, can be deferred indefinitely if the income is held abroad indefinitely. This money held abroad can be borrowed against and even used to invest in assets in the U.S.
Another Fortune 500 and other major companies avoid taxes is with accelerated depreciation. The relative degree of freedom in tax laws has allowed companies to expense the cost of their capital at a faster pace than it actually wears out.
This allows a company to declare less income and defer paying taxes until later years, and as long as the company continues to invest, the deferral of taxes can continue for an indefinite amount of time.
3. Stock Options
Giving out stock options to employees as a part of their compensation is another avenue that has helped companies reduce their total tax bill. When the options are exercised, the difference between what employees pay for the stock and its market value can be claimed for a tax deduction.
4. Industry-Specific Options
Finally, some industries such as research, oil and gas drilling, ethanol production, alternative energy, video game, and film production, are privileged by the federal tax code to receive certain tax breaks.