LinkedIn's Loss May Be Microsoft's Gain


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LinkedIn has a tax avoidance problem: the company is generating tax breaks faster than it can use them. Between 2010 and 2014, the company used the “excess stock option” tax break to virtually zero out its federal income taxes, paying an average tax rate of just 1.1 percent on $453 million of U.S. income. But even after doing so, the company is in the enviable position of having a huge pile of unused stock-option tax breaks that can be exercised in years to come.

In the footnotes of its annual financial report, LinkedIn discloses that it has enough unused stock option tax breaks to zero out income taxes on the next $463 million of U.S. profits it earns. The bad news is that you have to earn a profit to use the stock option tax break, and LinkedIn itself has not appeared especially confident that it will do so going forward. This is one reason why Microsoft’s recently announced acquisition of LinkedIn appears especially fortuitous: When Microsoft buys LinkedIn, it is also buying LinkedIn’s stockpile of unused tax breaks. And as a consistently profitable company, Microsoft will certainly be able to make full use of its newly acquired stock option tax breaks.

As explained in a recent Citizens for Tax Justice report, companies that pay their executives in stock options instead of cash can pretend, for tax purposes, that they actually “spent” the value of these options, and can reduce their taxable profits by (most of) the amount of this alleged “cost.” The stock option tax break is a favorite of Microsoft as well, reducing the company’s tax bills by $1.17 billion over the past five years.

LinkedIn, like a number of other prominent tech companies, is notorious for relying heavily on stock options as a way of paying its employees without incurring an actual cash expense. Microsoft’s acquisition is a reminder that as long as the excess stock option tax break remains on the books, the use of stock options by companies such as LinkedIn can also be a remarkably effective way to become an attractive takeover target. 

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