Zoom's master move to save taxes!
Here's how companies like Zoom are earning millions of dollars in profits but paying zero taxes!
2020 for Zoom:
Profits: $664 mn
Tax: NIL
But, how?!
Quarantine,Lockdown and Zoom were the words of the year 2020. To adapt to the new normal, companies all over the world were subscribing to Zoom plans.
Zoom's popularity rose so much that even Shweta's viral call that happened on Microsoft Teams was called a Zoom call!
It's true now. Video call = Zoom Call.
Result?
Zoom's profits zoomed up by more than 4000% and stock prices by nearly 400%, but its tax bills were at $0.
It's not just Zoom. Other bigshot companies such as Amazon and Netflix also use some magic formula to reduce their tax bills.
Here's how...
By paying $580 mn in stock compensation (giving shares of their company as a reward) to the employees.
But, that should also lead to a reduction in profit, right?
No. The financials (Profit and Loss and Balance Sheet statements) that the company prepares for showing to the investors have different rules from the financials they prepare for showing to the tax department for tax purpose.
So, when the company prepares the financials for investors, the cost of the stock is considered to be the price (on the stock market) on the date the company gives the shares to the employees and that amount is deducted from profits.
Now, the employee has to wait for a certain period before they can cash in.
And, this is where the problem begins.
The waiting period can lead to a strong spike in a company's share price. Like what happened for Zoom (thanks, Covid).
And, the amount at which the employee finally cashes in the shares is taken as an expense for Income Tax purpose, leading to reduction in profits.
So, Zoom reported lower expenses and higher profits to investors. You know how crazy investors are about profits!
But at the same time, it could reduce its profits for Income Tax purposes and save itself a significant amount of taxes.
So, Zoom is having its cake and eating it too. (Hindi: Chit bhi Meri, Patt bhi meri)
So, who's paying the taxes you ask?
Well, the employees who are making massive gains from selling the stocks.
And, Bernie Sanders is not happy about companies evading taxes like this!
Stock compensation is not the only way big companies save on taxes. They have other tricks up their sleeves, such as expensing off the massive research and development expenses they incur (depreciation).
Do you think this is fair or should the big companies pay more taxes?
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