General Discussion
In reply to the discussion: Tax Deductions are a HUGE form of welfare, and the richest people are getting the most welfare [View all]joeglow3
(6,228 posts)As a tax accountant, I like to look into how these numbers get reported. For instance, a few years ago, people were mad that YUM Foods did not pay taxes. However, the issue was much more technical and hard to understand for those who don't do taxes. I will try to explain:
There are adjustments when preparing your income tax return called "temporary differences." An example is depreciation: book accounting and tax accounting depreciate fixed assets at different rates. Over, the long term, both will expense the entire cost of the asset, but the deductions will be different in any given year. In the case of YUM, they had expensed pension costs for years for book, but never made any cash contributions to their plan. For book, they recorded an expense and an offsetting liability on their balance sheet. Every year, they had to add back this expense on their income tax return, creating a deferred tax asset (future tax deduction when a cash payment is made). In the year in question, they made a HUGE cash contribution to their pension plan, (they reduced cash and the offsetting liability for book, since the expenses had already been recorded). This resulted in them getting to deduct all the book expenses they had added back for years. In reality, this is very favorable tax treatment for the government as the deduction is deferred for years. It was misleading for people to claim outrage over this, as the government benefitted greatly from this treatment.
In the case of GE, their tax rate looks low since so much of their income is earned overseas (ie the product is made and sold overseas). The US is one of only a few countries that taxes worldwide income (ie income not earned in their country). However, that income is not taxed until it is repatriated. Thus, the shareholders have ZERO access to that money until it it comes back to the US and taxes are paid. When that happens, GE will have a tax rate well over the income (ie a tax rate of many multiples of 100%).
Now, there are companies like Apple that hide IP overseas to artificially transfer profits outside the US and that should definitely be changed.