Amazon: the second biggest employer in America, behind only Walmart.
Not only has Amazon elevated Jeff Bezos tothe top of the world’s richest people list, it is also one of the most notorious tax avoidersin American history.
In this video we’re gonna see how Amazonvery legally paid $0 in federal taxes during 2018 and we’re gonna learn just how dubiousits 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 bootand Amazon stock being down 20% since last year’s highs, it’s safe to say that Amazonhas been playing on the back foot so far.
And yet, 2018 was a record year: Amazon morethan doubled its profit to $11 billion and more importantly got to pay $0 in income taxeson 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 taxbill by using deductions, but unlike you or me, Amazon has access to much more lucrativedeductions that can be grouped in three different categories, some more reasonable than others.
The first and cleanest sort of deduction Amazonmakes use of is the research and development tax credit, which works in a rather simplemanner.
Roughly 7% of what Amazon spends on wagesand 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 betterway to encourage innovation than by handing out tax deductions.
In 2018 Amazon saved almost one and a halfbillion dollars thanks to the R&D credits, but that’s just the start of it.
As you know, in 2017 President Trump did hisbig revision to the US tax code and one of the things he slipped in there is a temporaryboost 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’stax revision allows companies to skip this process entirely, getting the full tax benefitfrom the very start.
In other words, when Amazon builds a new datacenter, for example, it gets to claim the full cost of it as a tax deduction now insteadof spreading it out over the course of 40 years.
Now, this particular provision in the taxcode is gonna last until 2022, but you can already see the impact it has now: Amazon’sdepreciation has increased by 40% in 2018.
Unfortunately it’s not possible to knowexactly 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 deductionAmazon takes is thanks to its use of stock-based compensation and it’s a very sneaky one.
You know how all the big corporations paytheir senior employees not in cold, hard cash, but in stocks? Well, they do that not out of the kindnessof their hearts or because they’re so concerned about employee ownership, but rather for amuch simpler reason: it saves them a lot of money.
You see, when Amazon pays its employees instock, it gets to deduct the value of the stock it gave just as you would deduct a regularwage.
But there’s a huge issue here, because Amazondid 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 printnew dollars.
The ones who actually pay for this charadeare the Amazon stockholders, whose existing shares are worth less because Amazon is constantlycreating more of them to pay its employees.
This strategy works, as long as the stockprice keeps going up: and the only stock that’s gone up more than Amazon in the past decadeis, surprisingly, Domino’s Pizza.
But in any case, this brilliant strategy notonly makes Amazon’s wages effectively free for the company, it also gives it a huge taxdeduction: in 2018, Amazon saved a billion dollars by paying its employees in sharesit created for free.
Now, you’re probably wondering why doesn’teverybody do this? After all, the laws that govern Amazon applyto every other company in exactly the same way and the answer is Jeff Bezos; no, thereal answer is that most companies struggle to keep their stock price going up withoutconstantly buying back their own shares.
Stock buybacks are extremely popular and Amazonis actually one of the few companies that doesn’t do them.
Most companies first go to the stock marketto buy their own shares, which increases their price, and then they hand them out to theiremployees, and it mostly balances out.
But Jeff Bezos just skips the buying partbecause 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 theultimate Wolf of Wall Street because he’s honestly he’s making billions off of this.
And if you’re interested in making billionsoff of the stock market in morally-questionable, but 100% legal schemes, well then I’d liketo interest you in the two investment courses I made on Skillshare.
They’re gonna teach you all about the stockmarket, including the stock buybacks Jeff Bezos so consistently avoids.
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Once you’ve signed up there you should alsofollow 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.