The impending flotation of Facebook will make founder and majority shareholder Mark Zuckerberg an obscene amount of money, but will also turn him into the biggest taxpayer in the US, reports AccountingWEB.com.
According to CNNMoney, Zuckerberg owns 414m Facebook shares, with options to buy another 120m at 6 cents apiece. In its initial public offering (IPO) paperwork, Facebook said it values the shares at $29.73. When he sells any shares, Zuckerberg will have to pay tax on the difference between 6 cent option price and the market value on the day he exercises them.
The total value of Zuckerberg’s holdings, if Facebook achieves its valuation targe will be somewhere in the region of $15.9bn. The 120m options, if he exercised them at the time of the public offering would net around $3.6bn, on which he would have to pay Alternative Minimum Tax (AMT) at a rate of 28% - amounting to just $3m shy of a billion dollars, ($996,912,000).
If the shares are held for a year after the date of exercise, any profit would be taxed as a long term capital gain at a rate that will be 20% in 2013.
But Stan Pollock, a San Francisco accountant who specialises in stock options planning explained that the best way for those in Zuckerberg’s position to settle the tax liability would be to sell off extra shares to settle it.
“We learned from the dotcom bust that people should do it that way - sell shares to cover the tax bill,” said Pollock. In the early part of the centry, many technology workers didn’t sell their shares when they exercised their options and then saw the value drop. “A lot of people were stuck with huge tax bills and no money to pay the bills,” Pollock said.
Other questions that arise from going public include how much income tax Zuckerberg will have to pay on any shares that he sell immediately. If he follows the example of Oracle CEO Larry Ellison and uses the stock as collateral for loans, he can avoid paying income tax, advised tax lawyer David S Miller in his New York Times column. Ellison borrowed more than a billion dollars against his shares and bought one of the world’s most expensive yachts.
Zuckerberg could sit on his shares to avoid all income tax, and then pass them on to heirs at his death. When the inheritors dispose of the shares, they will only have to pay tax on any increase in value that occurs after their benefactor’s death.
But the Facebook windfall is stirring up resentment and political pressure for reform. NYT columnist David Miller argued that the tax code should be changed so that super wealthy people like Zuckerberg should pay “at least a little income tax on their unsold shares” through mark-to-market taxation.
Democratic senator Carl Levin, meanwhile, wants to close the corporate tax “loophole” that allows companies to deduct the value of stock options from their tax bills when the options are exercised. Such deductions will effectively write off the tax on its profits for 2011, Facebook revealed.
“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,” Levin told the New York Times.