Feb 15th 2012
By AccountingWEB Staff
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Facebook founder Mark Zuckerberg may face a tax bill of $2 billion by taking his company public.
Why so high? Tax experts say it's because of his plan to exercise stock options. According to CNNMoney, he owns 414 million shares of Facebook but also holds options to buy another 120 million shares at 6 cents apiece. Facebook said in its Initial Public Offering (IPO) paperwork that it values its shares at $29.73, so that means Zuckerberg will have to pay taxes on the difference between 6 cents and the market value on the day he exercises his options. At the $29.73 price, the options would be worth about $3.6 billion.
The Wall Street Journal reported that he'll be one of the biggest taxpayers in 2012 or 2013, since the 400 top earners in the United States paid an average of $48 million each in taxes.
To cover the tax bill, he plans to sell some of his shares - a move that's a smart one, according to Stan Pollock, a San Francisco CPA who specializes in stock options planning. "We learned from the dot-com bust that people should do it that way - sell shares to cover the tax bill." The value of stock options is set the day the option is exercised. Many tech workers didn't sell and then saw the value drop. "A lot of people were stuck with huge tax bills and no money to pay the bills," Pollock told CNNMoney.
Zuckerberg's tax bill raises other questions, such as the amount of income tax he'll pay on the rest of the stock that he doesn't sell immediately. The answer? Possibly none. He can follow the lead of Oracle CEO Lawrence J. Ellison and use his stock as collateral to borrow against his wealth and pay nothing in taxes. This is according to The New York Times op-ed columnist and tax lawyer, David S. Miller, who noted that Ellison borrowed more than a billion dollars against his shares and bought a yacht - one of the priciest in the world.
Theoretically, Zuckerberg could keep his shares, avoid all income tax, and then pass them on to heirs at his death. When they sell, the tax will only relate to the appreciation since Zuckerberg's death.
Miller, therefore, called for a tax code change that would require the "super wealthy," like Zuckerberg, to pay "at least a little income tax on their unsold shares" through mark-to-market taxation.
One lawmaker isn't happy about what he calls the "stock option loophole." The IRS allows companies to deduct stock option values when exercised. Facebook estimated that the deduction will eliminate the tax bill for its profits of $1 billion in 2011.
US Senator Carl Levin (D-Mich) told the Times, "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. It isn't right, and we can't afford it."