In-depth coverage
The AJC reported last week that Georgia’s largest companies paid an average federal income tax rate of 15 percent — well below the 35 percent corporate tax rate. Since World War II, the corporate share of federal taxes has declined substantially, while individuals’ share has risen. This week, the AJC looks at Georgia companies that paid no federal taxes for years.
Georgia companies that paid no federal income taxes
Thanks to tax breaks, some big Georgia companies paid no federal income taxes from 2011 to 2013, even though they were profitable. Others lost money, and some showed losses due to tax breaks that reduced their reported profits and taxes. In most cases of negative taxes, companies don’t get refunds, but use the credits to offset future taxes.
Company… Pre-tax profits… Federal income tax
RockTenn… $1.3 billion… -$13.2 million
Invesco Mortgage Capital… $834 million… $0
Post Properties… $189 million… $0
Gray Television… $92.3 million… $0
SED International Holdings… -$9.7 million… -$53,000
Adcare Health Systems… -$30.4 million… -$97,000
Sunlink Health Systems… -$30.5 million… -$6.2 million
Cousins Properties… -$149.4 million… $0
Cumulus Media… -$201.1 million …-$1.3 million
EarthLink Holdings… -$258.0 million… -$1.8 million
Beazer Homes USA… -$408.4 million… -$40.6 million
Gentiva Health Services… -$1.2 billion… -$4.0 million
HD Supply… -$1.8 billion… $0
First Data Corp…. -$2.5 billion… -$115 million
Source: Calbench, company filings to SEC
One out of six large Georgia companies haven’t paid federal taxes for at least three years — even as some booked millions of dollars in profits, according to an Atlanta Journal-Constitution analysis.
The AJC looked at 2011-2013 tax disclosures of Georgia’s 86 largest publicly-traded firms with at least $100 million in annual sales. Almost half of those companies didn’t pay federal taxes in at least one of the last three years. Of those, 14 firms paid no federal income taxes during any of those three years.
Since 2011, for example, RockTenn has earned $1.3 billion in pre-tax profits, but its income tax payments to Uncle Sam have been negative, meaning it either got refunds or credits to offset later taxes.
The Norcross-based paper maker has amassed more than $500 million dollars of tax breaks to cancel out its federal tax bills. Some came from taking over a money-losing rival. Other savings came from joining other paper makers claiming a new alternative fuel tax credit.
U.S. tax collections from corporations have eroded severely since World War II from such proliferating tax breaks. That shifts more of the tax burden on individuals and forces the federal government to cut services or borrow more money.
Washington is now scrambling to head off a new crop of tax breaks that threaten its corporate tax collections. Last week, the Treasury Department announced new rules aimed at so-called “inversions,” in which U.S. companies merge with foreign firms to avoid taxes on their overseas profits.
Some Georgia companies have avoided taxes the old fashioned way — by losing money.
But four of the 14 Georgia companies on the no-tax list reported substantial profits. And several others, whether profitable or not, benefited from tax-free corporate structures or loopholes that allowed them to either offset reported profits or report bigger expenses and losses, eliminating their taxes.
Some companies are now paying bondholders instead of Uncle Sam.
Three firms on the no-tax list — First Data Corp., Cumulus Media, and HD Supply — were acquired by private equity firms. Before they were acquired, all of the companies were making profits, sometimes hundreds of millions of dollars, and paying hefty taxes.
But after their new owners loaded them up with tax-deductible debt that helped finance the acquisitions, they had some of the largest losses on the no-tax list.
Atlanta payments processor First Data Corp. hasn’t made a profit since it was acquired by Kohlberg Kravis Roberts in 2007, thanks to interest payments topping $1.8 billion a year on its debt. First Data had a $760 million pretax loss last year. It now has almost $2.7 billion worth of tax breaks tied to past losses that will come in handy when it is profitable again. Such tax breaks can be used for up to 20 years — far longer than most countries’ tax authorities allow.
“The tax benefits can be enormous,” said Martin Sullivan, a former Treasury official and chief economist at Tax Analysts, a non-profit group. “The fundamental laws of tax gravity are at work here. If they can do it, they will do it.”
Fueling tax savings
RockTenn offers an example of how valuable those tax breaks tied to past losses — even if they weren’t its losses — can be.
Since 2010, RockTenn’s before-tax profits have more than doubled, from $295 million in 2010 to $711 million in 2013. But at the same time, its federal tax bill dropped from $93 million in 2010 to a negative $13.2 million over the next three years.
How? It reaped millions in tax savings from loopholes tied to its $4.9 billion acquisition of Smurfit-Stone Container Corp. in 2011, plus special tax breaks for using non-fossil fuels.
Fresh out of bankruptcy when it it was acquired, Smurfit-Stone came with nearly $500 million in tax breaks tied to earlier losses that RockTenn could tap into to offset its profits and reduce its taxes.
RockTenn also cashed in on alternative fuel tax credits from both firms.
Congress enacted the two fuel credits several years ago to encourage manufacturers to come up with new ways to produce non-fossil fuels such as ethanol alcohol from crop waste.
Paper makers have been burning so-called “black liquor,” a manufacturing byproduct, to power their factories “since the dawn of time,” said Sullivan.
But several years ago “some smart guy figured out this technically qualified for alternative fuel tax credits,” he said. Even though it wasn’t a new use, the Internal Revenue Service allowed it.
The paper industry quickly reaped billions of dollars of tax savings from the credits. Lawmakers didn’t agree with the IRS, and shut down new uses of those credits by the industry.
But not before RockTenn racked up more than $250 million worth of such tax credits that it is still using to reduce its federal tax bills, according to its filings to the U.S. Securities and Exchange Commission.
RockTenn said it expects to pay more taxes soon.
“We expect to pay approximately $25 million in cash taxes in fiscal year 2014, with significant increases in fiscal year 2015 and beyond,” RockTenn spokeswoman Robin Keegan said in an email.
If RockTenn matches last year’s $711 million pretax profit, that $25 million works out to about a 3.5 percent tax rate — about the same as the typical taxpayer making $34,823 would pay, according to IRS data.
Companies don’t report their actual income tax payments. The AJC’s analysis used companies’ disclosures of “current” tax figures, which some experts say are a reasonable substitute. Data from the disclosures were compiled for the AJC by Calbench, a corporate data analysis firm.
Taking a pass on taxes
Atlanta-based Post Properties reported $189 million in pretax profits during the last three years, but paid no federal taxes because it is a Real Estate Investment Trust, or REIT — essentially a mutual fund-like company that invests in real estate. The no-tax list has two other REITs: Invesco Mortgage Capital and Cousins Properties.
REITs are a type of “pass-through” corporation — so called because it passes on its profits to its shareholders, who are responsible for paying taxes, usually at a lower rate than the 35 percent corporate income tax rate.
Such “pass-throughs” are another big reason the nation’s corporate tax revenue has withered, according to the Congressional Research Service. As a rising number of traditional corporations have converted to “pass-through” structures such as partnerships and closely-held firms, their share of the nation’s business income has dropped to 27 percent, from 78 percent in 1980.
That migration is “a trend that’s been going on for a very long time,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center in Washington, D.C. But more companies are now using REITs as well to cut their taxes. “Corporations are figuring out how to use these structures,” he said.
To do this, they spin off part of their operations, such as timberlands, telecommunications networks or mortgage portfolios, into a REIT that pays no income taxes. Then they lease the assets back. Voila: a new tax break.
Such deals were a “trickle” a few years ago, said Sullivan, but “it’s really accelerating.”
Billboard company CBS Outdoor morphed into a REIT this year. Atlanta-based Georgia-Pacific was an early pioneer of the strategy in 2001. The paper products maker spun off its timberlands into a separate unit that Plum Creek Timber, a REIT, bought in a tax-free deal.
Then Georgia-Pacific, itself, became a “pass-through” corporation when privately-held Koch Industries bought it in 2005.
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