Majority of Corporations Avoid Taxes, Says Study

August 12, 2008 Updated: March 5, 2016

NEW YORK—Don’t pay any income taxes? Believe it or not, some multimillion, multinational corporations also do not pay federal income taxes. A new report issued by the U.S. Government Accountability Office (GAO) found that the majority of U.S. corporations fail to pay federal income taxes.

Although corporations taking losses do not pay income taxes, the GAO’s study found that over 60 percent of U.S. corporations—with revenue totals of more than US$2.5 trillion—did not pay federal income taxes. The companies studied also include small businesses.

The study selected sample returns between 1998 and 2005, and did not name specific companies. It also did not suggest reasons for not reporting tax liabilities.

While corporations usually aim to report higher earnings to shareholders and Wall Street analysts, income for taxes can be drastically different than net income for financial reporting. The taxable income may be offset by prior period deferrals, various federal tax credits, and other write-downs prohibited by U.S. generally accepted accounting standards.

The GAO found that 25 percent of all large corporations did not owe federal taxes in 2005. A large corporation is defined as a company with more than $250 million in assets.

The study was commissioned by Sen. Carl Levin (D-Mich.) and Sen. Byron Dorgan (D-N.D.) and was originally intended to investigate tax aversion in corporate transfer pricing. Transfer pricing is a way for companies to allocate sales and costs between different divisions and different jurisdictions.

The report did not mention any issues surrounding transfer pricing.

Corporate Taxes and Credits

While many companies ring up millions in sales, they may not necessarily make a profit. According to the U.S. Internal Revenue Code, only companies whose revenues exceed their expenses are subject to federal tax.

Revenues of a company come from sales, interest received, and any prepayments the company may have received such as interest or rent payments. All ordinary business expenses are deducted from revenues, including money to purchase equipment, capital assets, goods, and payroll.

There are a number of special deductions corporations are entitled to, such as the federal “domestic production deduction,” which rewards companies for not outsourcing abroad. Charitable donations and bad debts—where customers fail to make payments—are all deductible.

One prominent tax credit used by many large businesses is the “Low-Income Housing Credit,” which grants corporations a tax benefit for investing in low-income housing in the United States. Created by the Tax Reform Act of 1986, it is currently one of the most successful programs for providing urban housing.

Corporations that wish to participate invest money in a syndicator, which provides funding for state housing developers for low-income housing. The tax credits are in turn passed on by the developer to the investors.