California Starts Counting Its Facebook Money
A few weeks ago, while waxing poetic about the tax implications of the Facebook IPO, we made the following observation:
…Zuckerberg will be exercising options to purchase 120 million shares of Facebook stock after the IPO. These shares have an exercise price of 6 cents per share, so if the stock price reaches $40 per share as anticipated, Zuckerberg stands to make $4.8 billion in compensation upon exercise. That’s right…billion. The tax bill on that $4.8 billion — between federal and California — could reach nearly $2.0 billion, so Zuckerberg will have to sell additional shares to generate some cash. Needless to say, collecting state income tax of this magnitude from Zuckerberg and other Facebook employees could provide a temporary reprieve to the long-struggling California economy.
Well, itappears California’s bean counters have finally quantified the expected impact of the IPO, as the state has announced it is anticipating a $2.5 billion windfall of additional tax revenue.
Crunching the numbers, Zuckerberg’s tax bill on his exercise of employee stock options aloneshould approach $480 million, leaving $2 billion of tax revenue still to be explained. My guess is this revenue will be comprised of the following:
- Zuckerberg intends to sell just enough Facbook shares to produce the cash necessary to pay his expected $4.8 billion tax bill. The sale of these shares will also generate significant gain, 10.3% of which will wind up in the state coffers.
- Many Facebook employees, tired of being paper rich, will likely cash out some or all of their shares and become overnight millionaires. While these sales will result in capital gain — rather than ordinary income — for any employee whopreviously made a Section 83(b) election to include the value of therestricted shares in income, because California does not differentiate between the two types of income, the state will collect 10.3% on all the gain generated from the sale of Facebook stock.
Because Facebookshares will likely face restrictions on transferabilityforsix months after the IPO, a large portion of the tax revenue will not inure to the state until 2013. Perhaps this explains why only $500 million of Facebook tax revenue is being budgeted for 2012 (essentially Zuckerberg’s piece ), with the remaining $2 billion budgeted for 2013 and beyond.
While this windfall, should it materialize, would put a nice dent in the current $9 billion state deficit, I can’t help but wonder if the state has considered the lost corporate revenue resulting from the IPO. For every dollar of compensation income recognized by Zuckerberg and others upon the exercise of nonqualified stock options, Facebook receives a corresponding tax deduction. As a result, Facebook expects to generate a net operating loss in 2012. A loss big enough, according to the IPO filing, to be carried back and result in $500 million in refunds of previously paid tax. The filing does not indicate how much of that refund is attributable to California, but almost certainly a portion of it is.
Couple the state’s obligation to refund thesetaxes with the absence of any 2012 tax revenue collectedfrom one of the world’s most profitable companies, and California may not be in for the payday it so desperately needs.
