Recent media reports have highlighted the fact that Amazon owed the federal government no income taxes during the past year. However, this should not be cause for concern.

There is nothing sinister here – Amazon utilized no loopholes and fully followed the law. The company owed no taxes in 2018 because they utilized several credits and deductions for research-and-development costs, investment costs, losses from previous years, and employee compensation.

Corporations pay taxes on net profit, not income, and the deductions taken exceeded the company’s profits.

These tax provisions are all good policy. For example, the research & development credit allows companies to quickly recover the cost of expenditures for research and experimentation. This credit has bipartisan support – it was first created under President Reagan and was routinely extended and then made permanent by Congress.  President Obama even proposed expanding the credit in several budget proposals.

Amazon also utilized full business expensing, which allows companies to deduct the cost of new equipment purchased. This important policy encourages investment and helps grow the economy – even the Organization for Economic Co-operation and Development (OECD) has recognized that expensing increases GDP.  

The company also took net operating loss carryforwards because of losses in previous years.

Finally, Amazon deducted stock compensation granted to employees. This should not be cause for concern. As noted in a Bloomberg article, stock benefits are eventually taxed:

“The U.S. government is better off because Amazon employees end up paying more in tax than the company can write off. Companies take that deduction off their profits taxed at a 21 percent rate. Employees must pay tax on the income they receive from those shares at rates that top out at 37 percent.”

In addition, this deduction is based off the share price of stock and Amazon’s stock has surged in recent years, significantly increasing the value of the deduction. 

It is also important to note that Amazon is still paying taxes — the company owes $322 million in state taxes and paid the government employer payroll taxes for its more than 200,000 employees.

Regardless, Amazon’s zero federal income tax liability is a non-story. The truth is the company utilized several common, yet important business credits and deductions which exist to encourage investment and promote economic development.