One Tax Loophole Apple's Tim Cook And Lawmakers Didn't Talk About

The Billion-Dollar Loophole Cook Forgot To Talk About

When Apple CEO Tim Cook appeared before a panel of Senators Tuesday, much of the questioning centered around why so much of the company’s money sits untaxed overseas. Cook defended the practice, saying his company doesn’t “depend on gimmicks” to lower its tax rate. But a report released earlier this year found that Apple has saved billions using another form of creative accounting.

Apple is one of a number of companies that saved billions of dollars by taking advantage of the “excess stock options” tax break, the left-leaning Citizens for Tax Justice found last month. The legal tax loophole allows corporations to deduct compensation that they dole out to executives in the form of stock options as an expense, the same way they would deduct cash compensation. Stock options, unlike cash compensation, however, don't hurt a company’s bottom line.

“The only meaningful costs associated with this are that the more stock you issue, the more it dilutes the value of the stock that's already held by shareholders,” Matthew Gardner the executive director of the Institute on Taxation and Economic Policy told The Huffington Post last month.

Apple took home $3.2 billion between 2010 and 2012 thanks to this tax break -- the most of any company, the report found. But it’s not the only company taking advantage of the loophole. Activists have criticized Facebook over its use of the executive stock option tax break in recent months after the social networking giant used it to wipe out its entire tax liability in 2012.

Though using the tax break has been rather common practice among technology companies, which tend to issue a higher percentage of their compensation in stock options, it’s becoming more common and lawmakers are slowly starting to take notice, Gardner said.

Sen. Carl Levin (D-Mich.), who asked most of the hard-hitting questions during the Apple hearing, introduced legislation last year that would put a cap on the amount of executive stock options companies could deduct from their tax bill, but it wouldn’t get rid of the tax break entirely.

To be fair, the Senate panel's hearing on Apple and the company’s responses largely focused on Apple’s offshore holdings because the practice of leaving profits overseas and subject to low taxes is “probably the biggest issue that ought to be addressed,” CTJ’s director Bob McIntyre told HuffPost. Indeed, companies are stashing a record $1.9 trillion offshore.

“Of course there’s other things companies do,” McIntyre said.

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