Paul L. Caron

Thursday, November 7, 2013

Fleischer: Twitter's Future Tax Bill

NY Times Dealbook (2013)New York Times DealBook:  Why Twitter May Have to Pay Income Taxes One Day, by Victor Fleischer (San Diego):

Potential investors in Twitters’s planned initial public offering may be struggling to estimate how much the company will have to pay in taxes in the future. An article in Politico on Friday highlighted some of the techniques Twitter might use to legally avoid taxes.

Twitter’s biggest potential tax shelter is its history of losing money. Like most growth companies, Twitter has accumulated a lot of operating losses. These losses, in theory, can be carried forward as net operating losses to offset future taxable income. But investors should not count on it.

Buried deep in Twitter’s S-1 (on page F-43) is a description of the company’s tax assets. A tax asset is an accounting item that represents a possible reduction of a company’s tax liability in the future.

For the year ending 2012, these tax assets total $91 million, a potentially significant amount of tax savings if Twitter starts turning a profit. But the financial statements then explain that management established a “valuation allowance”—that is, wrote down the value of the tax assets—by $42 million. That means the company believes that much of the value of these assets will not be fully realized.

This kind of valuation allowance is not unusual among newly public companies. According to research by Eric Allen of the University of Southern California, 82 percent of companies that held I.P.O.’s record an allowance that reduces the value of the associated deferred tax asset to zero.

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I haven't followed this IPO, but that sounds a bit alarming. Doesn't it mean that the company's accountants don't think there is over a 50% chance it will have enough taxable income within enough years to be able to use that $42 million in NOLs?

Posted by: Eric Rasmusen | Nov 7, 2013 7:31:05 AM