New York: Few billionaires are willing to reveal much about their taxes.
But the Facebook co-founder Mark Zuckerberg has indirectly done so in the documents for his company’s public stock offering later this year.
Mr. Zuckerberg, 27, one of the world’s youngest billionaires, plans to exercise stock options with an estimated value of $5 billion ahead of the offering. That could create a stunning tax bill of $2 billion.
Although I.R.S. officials declined to discuss where it might rank, Mr. Zuckerberg’s bill would most likely be among the highest ever for an individual. The 400 wealthiest filers paid an average of $48 million in federal income taxes in 2009, according to government data. Warren E. Buffett, the billionaire investor who has called for higher taxes on the wealthy, revealed in The New York Times last year that he paid less than $7 million in federal income and payroll taxes in 2010.
Mr. Buffett’s overall rate was about 17 per cent, largely because the federal government taxes most investments as capital gains at a top rate of 15 per cent, far less than the top rate on wages.
In addition to more than 413 million B shares of the stock Mr. Zuckerberg owns outright, he received options to buy 120 million shares of Facebook for 6 cents a share in 2005. The shares are currently valued at more than $40 a share.
When company options are exercised, they are generally treated as ordinary compensation, and the federal tax rate on such income tops out at 35 per cent. The exercise of Mr. Zuckerberg’s options would therefore mean more than $1.5 billion in estimated federal income taxes and $500 million more in California income taxes.
The taxes Mr. Zuckerberg and other Facebook shareholders pay on exercised stock options will translate into a big tax benefit for the company. The I.R.S. allows companies to take a mirror deduction for the employees’ option compensation. Facebook anticipates that the deduction will eliminate the tax bill on its $1 billion in 2011 profits, according to its regulatory filings. The company also expects the break to generate as much as $500 million in additional deductions, which can be used for refunds for 2009 and 2010 and for reductions in future years. Facebook declined to comment further on Mr. Zuckerberg’s tax plans.
Some members of Congress say the tax code gives preferential treatment to stock options by allowing companies to deduct their value when exercised, which is often far greater than the expense they claim on their books. According to the bipartisan Joint Committee on Taxation, the policy will cost the Treasury at least $20 billion in lost revenue over the next decade.
“Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation,” said Senator Carl Levin, a Michigan Democrat who has proposed changing the policy. “When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden,” he said. “It isn’t right, and we can’t afford it.”
Mr. Zuckerberg, whose wealth is estimated at more than $23 billion, may be positioning himself for a smaller future tax bite on his Facebook holdings. According to the filing documents, he intends to exercise all the options and sell enough shares to cover taxes. He may retain the rest, and any further gains on those holdings, if held more than a year, could be taxed at the lower capital gains rate, now 15 per cent.