Zoom reported earlier this month it made $672 million in its fiscal year ended January 31, up 3,200% from the $21 million it reported making during the previous fiscal year. At the same time, Zoom also told investors this month what it expects to pay in federal taxes on those profits. The answer? Nada.
In fact, Zoom’s 2020 tax bill will likely be less than zero. That’s because Zoom, according to its financial statements, booked a $300 million tax credit last year to use against future earnings. That means not only did Zoom’s hundreds of millions of dollars in profits result in a federal tax bill of $0 for 2020, but it will also reduce what the company will owe to Uncle Sam for years to come.
“We are only taxing about half of all corporate profits,” observed Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, which put out a report on Monday highlighting Zoom’s likely $0 federal tax bill for 2020.
Gardner, like other experts CBS MoneyWatch talked to for this story, said Zoom didn’t appear to be using any loopholes or doing anything other than following U.S. tax law. “We are allowing companies to legally exempt a big chuck of income from taxation.”
Outsized executive compensation
The biggest reason for Zoom’s de minimis tax bill is outsized executive compensation. Zoom paid $580 million in stock compensation alone in 2020, much of it likely to a handful of top executives, according to a calculation by CBS MoneyWatch based on the company’s latest financial filings.
And that’s on top of what it pays its senior executives in salaries. CEO Eric Yuan, for instance, had a cash salary of $300,000 for 2020. On a single day in mid-December, Yuan cashed in a stock grant worth nearly $72 million.
There is no way to know for sure what taxes Zoom has paid or will pay for 2020. Companies, like people, are allowed to keep their tax filings and payments private.
As a publicly traded company, Zoom has until the end of May to disclose how much it paid its top executives last year. But also as a public company, Zoom must give its shareholders a rough indication of how taxes will impact profits. Tax experts contacted by CBS MoneyWatch agree that, based on its filings, Zoom is unlikely to have to pay federal income taxes anytime soon.
“It doesn’t seem likely that Zoom would pay taxes in 2020,” said Bob Willens, one of Wall Street’s top tax and accounting experts.
A spokesperson for Zoom declined to say whether the company paid federal taxes for 2020 or answer any other questions on its tax bill, or lack of one. In a statement provided to CBS MoneyWatch, the Zoom spokesperson said the company “complies with all applicable tax laws in the countries where we do business.”
The spokesperson also pointed to Zoom’s R&D spending, which companies can use to lower their tax bill, but which in Zoom’s case isn’t the major driver of its tax savings.
While Zoom didn’t report an expense for a federal U.S. income tax payment in 2020, it did estimate it’s likely to pay as much as $5.7 million in total taxes for 2020, much of that to foreign governments. Zoom made $14 million in foreign pre-tax profits last year, and it paid nearly $4 million in taxes on that income, for a tax rate of 28%. Factor in the company’s U.S. profits and tax payments, and Zoom’s overall tax rate for last year falls to just 0.8%, far less than the 21% that companies are supposed to pay in federal income taxes before deductions.
Stock grants as tax breaks
The main source of Zoom’s tax saving, and that of a number of tech giants such as Amazon, is its executive stock grants.
Here’s where things get a little tricky. In reporting their profits to investors, companies can expense stock grants at the price they are worth on the day they are granted. But when it comes to taxes, companies are allowed to write off the higher amount those shares are worth on the day an executive actually cashes them in.
So when you have a company, like Zoom, that tends to issue a lot of stock grants (3.3 million shares last year alone) with a soaring share price (up nearly 400% in its latest fiscal year), what you get is a pretty big gap.
As a result, in Zoom’s case, the company told its shareholders that issuing stock to executives had cost the company $275 million last year. But it told the IRS those same stock grants cost the company $580 million, or $305 million more, which was enough to erase the more than $140 million it should have owed in taxes on its $670 million in profits. And then some.
Despite that double treatment, Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, says the way the tax code treats stock options makes sense. Companies are generally allowed to write off the total value of what they pay employees, whether it’s in cars or cash or some other perquisite. Make an exception for stock grants, and, Rosenthal says, you will end up with other loopholes for companies to exploit.
Employees, on the other hand, have to pay taxes on what they earn, which would cover the value of the option when it is exercised, not granted. And for tax collection and enforcement purposes it is much easier to collect taxes at the time a stock option or grant is sold by the employee, rather than when it is issued by the company.
“From a tax standpoint, it is good policy,” said Rosenthal. “It’s only half the story to say Zoom paid no taxes, because the executives picked up the income and they paid the taxes.”
Others disagree. Vermont Senator Bernie Sanders thundered on Twitter this week: “If you paid $14.99 a month for a Zoom Pro membership, you paid more to Zoom than it paid in federal income taxes … It’s time to end a rigged tax code that benefits the wealthy & powerful.”
President Joe Biden hasn’t released proposals to raise corporate taxes yet, though he has said he plans to do so. In the past he has said the amount of taxes that companies pay should be closer aligned with their reported profits than they are now.
“There is nothing exceptional or illegal in what Zoom is doing here,” said Gardner, the author of the report on Zoom’s $0 tax bill. “The real question is that at a time when a lot of businesses have had trouble keeping the doors open, if a company that has had the success of Zoom in the past year is not going to pay taxes, then who is.”