Tax bills: Musk owes record $11 billion, Tesla $0 (apparently)
By Chris Isidore, CNN Business
Elon Musk has repeatedly bragged (or, perhaps, complained) that he will pay more federal taxes for 2021 than anyone has ever paid — around $11 billion. But Tesla apparently won’t pay a penny.
Tesla may not expect to pay federal taxes anytime for the foreseeable future — even though the company just reported its most profitable year ever by far. In 2021, Tesla posted net income of $5.5 billion and adjusted profit of $7.6 billion.
But buried in a footnote to its recent annual financial filing with the Securities and Exchange Commission, Tesla reports that its US operations lost $130 million last year on a pretax basis. It claims that all of its pre-tax profits – more than $6 billion – came from overseas operations, even though 45% of its revenue came from sales in the United States.
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Although Tesla says its foreign tax bill was $839 million, its state tax bill was only $9 million. And his federal tax bill was nil.
“It defies common sense, but it doesn’t defy the US tax code,” said Martin Sullivan, chief economist for Tax Analysts, a nonprofit tax publisher and expert on US corporate tax practices.
Moving profits offshore – on paper
Sullivan said he believed the $130 million loss on his U.S. operations was most likely due to a common practice for U.S. multinational corporations: structuring their operations so that overseas subsidiaries be those reporting income, leaving the US operation to have little or no taxable income to report.
For example, a company can transfer its intellectual property to one of these foreign entities and charge its US unit a fee for the use of this property. And so, the operation abroad is very profitable, while the American company – burdened with “costs” for the company itself – brings either a loss or very little income.
“It’s an American multinational thing. It’s very common. It’s almost professional misconduct not to,” Sullivan said.
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A recent report by the US Treasury Department found that 61% of the international profits of US multinationals are accounted for in seven small countries – Bermuda, Cayman, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland – known as tax havens. It’s a practice that many elected officials and the Biden administration have pledged to crack down on.
“Tesla and other giant corporations have a long history of using scams and loopholes to help them avoid paying taxes – it needs to stop,” said Senator Elizabeth Warren, a frequent critic of Musk. “Democrats are working to end Republican tax cuts for companies moving profits and jobs overseas.”
However, Congress has so far taken no action to stop him.
However, Tesla’s financial record does not specify exactly what it did. For example, it does not say in which country(ies) it made its profits while declaring a loss in the United States. And Tesla declined to answer a question about his filing.
Tesla doesn’t expect to pay US taxes anytime soon
Given the substantial financial assistance Tesla has long received from government support for its electric cars, the company doesn’t have to use a profit-offshoring game to avoid paying taxes. Instead, he could use past losses to shield his current income from any tax bills.
Again, this is common practice for businesses that lose money: losses lead to future tax relief.
Tech companies that lose money for years before turning a profit — like Amazon — have used this technique. The same goes for old companies that are in financial trouble, like all American airlines, which probably won’t have to pay taxes for years after posting billions of dollars in losses during the pandemic – despite billions in federal aid.
Similarly, American automakers competing with Tesla lost so much money in the first decade of this century that General Motors and Chrysler needed government bailouts. Despite these bailouts, neither company paid taxes for several years once they were profitable again.
Past losses are a huge and very valuable future tax benefit known as “net operating loss carryforwards”.
Tesla lost money for more than a decade before finally starting to report a net profit in 2020. These were real losses, which occurred when the costs of developing and building its cars in its early years far exceeded the money he could sell them for. He did this in hopes of making profits in the future as demand increased and costs fell. This is exactly what happened.
But, by accumulating billions of dollars in losses, Tesla was able to accumulate net operating loss carryforwards that it could use in the future.
Yet Tesla revealed in this week’s financial filing that it had not used any of those past losses to shield current earnings from taxes. And it took an accounting maneuver that suggests he doesn’t know if he’ll ever have to use those past losses to protect his US earnings.
Tesla is rather optimistic about its future, expecting 50% annual sales growth for the foreseeable future. If it believed its pretax losses in its domestic operations were temporary, it likely wouldn’t have taken this step of writing down those past losses as a way to eliminate future U.S. taxes, Sullivan said.
Is Tesla losing money at home?
There is another possible reason Tesla could have reported a pre-tax loss on its US operations:
— a maneuver that is not so much an accounting maneuver intended to reduce taxes as a warning signal on the viability of the company. Maybe it’s still losing money on the cars it sells in the US, and it can only make money by using the lower costs of a relatively new factory in Shanghai, China. .
That’s what one of Tesla’s staunchest critics and skeptics thinks. Gordon Johnson of GLJ Research, points out that Tesla was losing money overall until it started producing cars in Shanghai in October 2019. He thinks investors are giving Tesla too much credit for profits in the United States that he does not believe are real.
“I think it’s a huge deal,” he said of Tesla’s filing this week. “They effectively said they don’t plan to use net losses carried forward. That means their US operations are losing money. That’s a point we’ve made over and over again. Outside of China , Tesla is losing money.
But other analysts who have reviewed his books insist that Tesla’s profits, both at home and abroad, are real, no matter what his US tax forms say.
Johnson said if he’s wrong, it’s up to Tesla to be more transparent.
“The reality is, until they provide the disclosure, both explanations might be right,” he said.
Musk’s rare big tax bill
Musk has a habit of using the US tax code to pay little or no federal personal income tax. A report by ProPublica shows that in 2018, Musk and many of the world’s wealthiest Americans paid no income tax.
In Musk’s case, he receives no salary from Tesla, only very valuable stock options, as compensation. And under the US tax code, he doesn’t have to pay taxes on those options until he exercises them to buy shares at a fraction of their current value.
He will also have to pay taxes if he sells shares he already owned due to his previous investment in the company, which he has rarely done. But he did it last year too.
Musk has not exercised most of the options he holds. But he had options to buy 22.9 million shares due to expire in August 2022, and began exercising those options to buy additional shares late last year.
In total, he spent $142.6 million to buy shares worth $23.6 billion, earning him taxable income of $23.5 billion, taxable for 2021 at a rate federal about 41%.
Musk also sold a small fraction of the additional shares he already owned, sales that brought in $5.8 billion taxable at a lower capital gains rate.
Together, those stock trades likely resulted in a roughly $11 billion federal tax bill, which he tweeted about.
But this may well be the last time for years to come that he pays substantial federal tax, unless Congress passes one of various proposals to tax the net worth of the nation’s wealthiest people, rather than just their income. Several Democratic senators, including Elizabeth Warren, Bernie Sanders and Ron Wyden, have proposed this, but so far it has not come close to passing.
Unsurprisingly, Musk opposes such efforts and has mocked the three senators on Twitter.
The options exercised by Musk last year that produced the huge tax bill are not the end of his options. Tesla’s financial filing this week reveals that Musk received an additional 8.4 million options, bringing his total to 67.5 million.
But none of those options expire until 2028. And so it’ll probably be five years before he starts exercising those options, unless he leaves the company before then.
If he pays no federal taxes again, chances are his tax bill and that of his main business will be the same for those five years.
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