Amazon: the second biggest employer in America, behind only Walmart.
Not only has Amazon elevated Jeff Bezos to the top of the world’s richest people list,
it is also one of the most notorious tax avoiders in American history.
In this video we’re gonna see how Amazon very legally paid $0 in federal taxes during
2018 and we’re gonna learn just how dubious its methods really are.
This video is brought to you by Skillshare, who, as you know, are pretty awesome so go
check them out.
Amazon has had a tough start to 2019.
Between New York giving Jeff Bezos the boot and Amazon stock being down 20% since last
year’s highs, it’s safe to say that Amazon has been playing on the back foot so far.
And yet, 2018 was a record year: Amazon more than doubled its profit to $11 billion and
more importantly got to pay $0 in income taxes on it.
So how does Amazon do it?
Unsurprisingly, the answer is accounting, and it’s actually not as complicated or
as boring as you might imagine.
Amazon, like everyone else, reduces its tax bill by using deductions, but unlike you or
me, Amazon has access to much more lucrative deductions that can be grouped in three different
categories, some more reasonable than others.
The first and cleanest sort of deduction Amazon makes use of is the research and development
tax credit, which works in a rather simple manner.
Roughly 7% of what Amazon spends on wages and supplies for its R&D department, they
get to claim as a deduction, which makes sense: Congress would love to see America remain
a technological superpower and what better way to encourage innovation than by handing
out tax deductions.
In 2018 Amazon saved almost one and a half billion dollars thanks to the R&D credits,
but that’s just the start of it.
As you know, in 2017 President Trump did his big revision to the US tax code and one of
the things he slipped in there is a temporary boost to one form of deductions, specifically
depreciation.
Whereas in the past companies had to depreciate (or write off) their property and equipment
over many years, usually decades, Trump’s tax revision allows companies to skip this
process entirely, getting the full tax benefit from the very start.
In other words, when Amazon builds a new data center, for example, it gets to claim the
full cost of it as a tax deduction now instead of spreading it out over the course of 40
years.
Now, this particular provision in the tax code is gonna last until 2022, but you can
already see the impact it has now: Amazon’s depreciation has increased by 40% in 2018.
Unfortunately it’s not possible to know exactly how much of that new depreciation
is motivated by the favorable tax revision, but it’s probably safe to assume that it
had at least some effect.
Now, the final and sleaziest sort of deduction Amazon takes is thanks to its use of stock-based
compensation and it’s a very sneaky one.
You know how all the big corporations pay their senior employees not in cold, hard cash,
but in stocks?
Well, they do that not out of the kindness of their hearts or because they’re so concerned
about employee ownership, but rather for a much simpler reason: it saves them a lot of
money.
You see, when Amazon pays its employees in stock, it gets to deduct the value of the
stock it gave just as you would deduct a regular wage.
But there’s a huge issue here, because Amazon did not actually pay anything for the shares
it gave out.
It didn’t go and buy them off of the market: no, it just created them out of thin air because
it can, in the same way that the Fed can print new dollars.
The ones who actually pay for this charade are the Amazon stockholders, whose existing
shares are worth less because Amazon is constantly creating more of them to pay its employees.
This strategy works, as long as the stock price keeps going up: and the only stock that’s
gone up more than Amazon in the past decade is, surprisingly, Domino’s Pizza.
But in any case, this brilliant strategy not only makes Amazon’s wages effectively free
for the company, it also gives it a huge tax deduction: in 2018, Amazon saved a billion
dollars by paying its employees in shares it created for free.
Now, you’re probably wondering why doesn’t everybody do this?
After all, the laws that govern Amazon apply to every other company in exactly the same
way and the answer is Jeff Bezos; no, the real answer is that most companies struggle
to keep their stock price going up without constantly buying back their own shares.
Stock buybacks are extremely popular and Amazon is actually one of the few companies that
doesn’t do them.
Most companies first go to the stock market to buy their own shares, which increases their
price, and then they hand them out to their employees, and it mostly balances out.
But Jeff Bezos just skips the buying part because he’s confident that the stock is
gonna increase on its own, and indeed it does.
In a way, you can argue that Bezos is the ultimate Wolf of Wall Street because he’s
honestly he’s making billions off of this.
And if you’re interested in making billions off of the stock market in morally-questionable,
but 100% legal schemes, well then I’d like to interest you in the two investment courses
I made on Skillshare.
They’re gonna teach you all about the stock market, including the stock buybacks Jeff
Bezos so consistently avoids.
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Once you’ve signed up there you should also follow me on Instagram to watch the awesome
teasers I post for every upcoming video.
We’re gonna hear each again in two weeks, and until then: stay smart.