Looking at Some Corporate Tax Loopholes Ordinary Citizens May Envy

It’s Tax Day.

That means accountants across the country are working furiously to meet the midnight deadline for submitting individual returns.

In corporate America, however, many accountants are already done. The deadline for corporate returns this year was March 17, though companies could seek a six-month extension.

While individuals have long sought to take advantage of dozens of deductions and loopholes, corporations have famously excelled at this game.

How well? Companies paid an average effective federal tax rate of 12.6 percent in 2010, the last time the Government Accountability Office measured the rate. That compares with the nominal federal tax rate of 35 percent, so all those accountants appear to have done their jobs in exploiting the loopholes in our tax code.

The chairman of the House Ways and Means Committee, Representative Dave Camp, a Michigan Republican, proposed a vast reform of our tax code this year, eliminating a lot of the Swiss cheese that makes it so porous and, arguably, unfair. Mr. Camp’s proposal, as you might imagine, isn’t gaining a lot of traction.

In recognition of Uncle Sam’s payday, it’s only proper to take note of some of the most egregious corporate tax loopholes and some unexpected beneficiaries.

â–  For the last seven years, a debate has raged over the “carried interest” benefit taken by private equity and hedge fund executives. Instead of paying ordinary rates on much of their income â€" typically 35 percent for the highest bracket (39.6 percent for this tax year) â€" these executives pay the capital gains rate of 15 percent. It’s a clear loophole that is plainly unfair. Despite repeated efforts to repeal it, the loophole has remained, in part because of well-financed industry lobbying in Washington.

But much of the lobbying isn’t coming from the private equity industry â€" it’s coming from another beneficiary that often goes overlooked: the real estate industry. The carried-interest loophole is related to what is known as partnership accounting. Any company that uses such treatment can take advantage of the loophole. That means not just private equity and hedge funds, but also venture capital and much of the oil and gas industry. The National Association of Industrial and Office Properties, which has lobbied against the repeal of the loophole, says that “41 percent of all investment partnerships are real estate related.” When Mr. Camp announced his tax reform proposal, guess which industry was exempted? Real estate.

â–  If individual taxpayers are arrested, admit guilt and reach a civil settlement with the government, they cannot deduct the costs from their returns. But amazingly, a company is allowed to claim those costs as a business expense. JPMorgan Chase, for example, which has agreed to pay billions of dollars in fines for various transgressions, can deduct a large portion â€" and all the legal expenses â€" from its taxes.

“Ordinary citizens don’t deduct their parking tickets or library fines from their taxes,” U.S. PIRG, the federation of state public interest research groups, said in a statement. “Corporations like JPMorgan shouldn’t be able to deduct their settlements for wrongdoing either. The settlement loophole costs taxpayers billions each year.”

In one case, at least, JPMorgan has agreed to forgo this benefit. It will not take a deduction on its $1.7 billion fine related to its actions regarding Bernard Madoff’s Ponzi scheme, saving the taxpayers about $600 million.

And it’s not the only one. This year, Toyota, which admitted it hid safety defects from the public, agreed as part of a $1.2 billion criminal penalty with the United States government that it would not “file a claim, assert or apply for a tax deduction or tax credit.” The U.S. PIRG said this one line saved taxpayers $420 million.

Still, the U.S. PIRG highlighted a study conducted by the Government Accountability Office in 2005 that found that of 34 settlements worth more than $1 billion, 20 companies took advantage of tax rules to deduct all or part of the settlement costs.

â–  A tiny but symbolic loophole still persists. Companies that own aircraft can depreciate their planes more quickly than airlines â€" over five years instead of seven â€" and claim the deduction. In total, closing the loophole is worth $3 billion to $4 billion over a decade.

â–  A much larger loophole involves the deduction of executive stock options by the company issuing them. Inexplicably, many of Silicon Valley’s newest star companies will be able to shelter a large portion of their profits as a result. Citizens for Tax Justice estimated late last year that a dozen technology companies, including Twitter, LinkedIn and Priceline, “stand to eliminate all income taxes on the next $11.4 billion they earn â€" giving these companies $4 billion in tax cuts.”

The effect is enormous and has significantly changed the bottom line â€" and tax rates â€" at some of the largest companies.

“This tax break allowed Amazon to reduce its federal and state income taxes by $750 million between 2010 and 2012,” Citizens for Tax Justice estimated. “The company’s combined federal and state effective tax rate over this period was just 9.4 percent; absent the stock option tax break, the combined tax rate would have been 40.4 percent.”

The ordinary taxpayer, rushing to the mailbox, can only dream of this sort of break.