Facebook’s co-founder and CEO Mark Zuckerberg could face a tax liability of more than $2 billion this year, claimed a report by the New York Times on Friday, with the 27-year old billionaire expected to exercise an outstanding stock option to purchase 120 million shares in the company ahead of its upcoming IPO.
At present, Zuckerberg owns more than 413 million class B shares in Facebook. Additionally, the Facebook co-founder also received options to buy an additional 120 million shares at 6 cents a share back in 2005. With the shares presently valued at more than $40 each, Zuckerberg could stand to earn a profit of up to $5 billion with his stock option, which would result in about $1.5 billion in federal income taxes, plus another $500 million in California income tax.
The gains on Zuckerberg’s options will be taxed at the top US marginal income tax rate of 35 per cent as company options are generally treated as ordinary compensation, said John Barcal, associate professor of accounting at the USC Leventhal School of Accounting, to the Financial Times.
Zuckerberg’s tax liabilities could potentially be even higher if Facebook manages to reach the $100 billion IPO valuation, which some of investors have already predicted, added Barcal.
As a result, most analysts expect Zuckerberg to sell off nearly $1.7 billion of his Facebook stock during the company’s IPO in order to pay off the taxes that he will owe once he exercises his stock options.
A Facebook company statement published for its IPO says as much: “We expect that substantially all of the net proceeds Mr. Zuckerberg will receive upon such sale will be used to satisfy taxes that he will incur upon his exercise of an outstanding stock option to purchase 120,000,000 shares of our Class B common stock.”
While the company has thus far declined to comment on Zuckerberg’s tax options, Facebook is expected to benefit greatly from their co-founder’s tax liabilities as the Internal Revenue Service (IRS) allows companies to take a mirror deduction for employees' option compensation.
This would mean that Facebook’s entire tax bill for 2011 could already be covered by Zuckerberg’s tax payment, with tax reductions for the company expected in the near future as well.
“Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation,” said Senator Carl Levin, a Michigan Democrat who has proposed changing the policy.
“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,” he said. “It isn’t right, and we can’t afford it.”