How Fortune 500 Companies Avoid Paying Income Tax

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How Fortune 500 Companies Avoid Paying Income Tax

The Tax Cuts and Jobs Act reduced the corporation tax rate in the United States from 35% to 21%. (TCJA).The United States’ tax rate is now much more competitive with other countries, but businesses are always seeking for methods to save money.

Key Takeaways

  • With the passing of the Tax Cuts and Jobs Act (TCJA), the corporation tax rate was decreased from 35% to 21%.
  • Using offshore subsidiaries and tax havens, large multinational corporations may still save billions of dollars.
  • Accelerated depreciation and stock options are two more strategies utilized by Fortune 500 businesses to lower taxes, and certain sectors even give particular tax incentives.

The Real Tax Bill

In a 2017 analysis, the Institute on Taxation and Economic Policy (ITEP) discovered that between 2008 and 2015, 258 successful Fortune 500 businesses paid an average effective federal income tax rate of 21.2%, while the federal tax rate was 35%.

During the same time period, 18 firms evaded paying federal income taxes, including General Electric, International Paper,, and PG&E Corp. The following is a comprehensive list of the 18 corporations:

Between 2008 and 2015, a total of 100 corporations evaded paying income taxes in at least one year, with a combined pretax revenue of $336 billion.

However, rather of paying $118 billion in taxes at the 35% statutory rate, the plethora of tax incentives available to these corporations enabled them to achieve a negative effective tax rate. That is, they made more in after-tax income than in pre-tax income, thanks to tax breaks from the US Treasury.

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Companies Paying Even Less Now

Corporations have discovered a method to pay even less now that the corporate tax rate has been slashed to 21%. In December 2019, the ITEP issued an updated report on company taxes. According to their data, 379 businesses paid an average tax rate of 11% for the fiscal year.

In 2018, 91 of those corporations, including DowDuPont and Avis Budget Group, paid no federal income tax. Tax breaks for the 379 corporations totalled $73.9 billion, with Bank of America obtaining the most benefits at $5.5 billion.

How to Avoid Taxes

Corporations may avoid paying taxes or get tax breaks in a variety of ways.

1. Foreign Subsidiaries

Despite the fact that the corporation tax rate has been cut, businesses continue to use tax loopholes to save money. This involves figuring out how to move income from the United States to overseas companies in nations with lower tax rates, a strategy known as offshore tax sheltering.

The TCJA keeps open the possibility of tax savings via offshore incentives for businesses. Companies are not required to pay taxes on money generated overseas until it is repatriated. However, if the income is kept overseas continuously, that tax may be delayed indefinitely. This money may be borrowed against and even used to invest in assets in the United States.

2. Depreciation

Another way for Fortune 500 businesses and other large corporations to avoid paying taxes is via accelerated depreciation. Because of the considerable latitude in tax regulations, businesses may deduct the cost of their capital quicker than it wears out.

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This permits a corporation to report less revenue and avoid paying taxes until subsequent years, and the tax deferral may continue indefinitely as long as the firm continues to invest.

3. Stock Options

Giving stock options to workers as part of their remuneration is another way for businesses to decrease their overall tax cost. When the options are exercised, the difference between what the workers paid for the stock and its market value is deductible.

4. Industry-Specific Options

Finally, some sectors, including as research, oil and gas drilling, ethanol production, alternative energy, video game development, and film production, are exempt from government taxation.

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