What do N.H. corporations pay in federal taxes?



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Public corporations in the United States are supposed to pay taxes at a 35 percent rate. But effectively, on average -- and by any measure -- they don't, although it does seem that smaller public companies in New Hampshire pay at a higher rate than corporations pay nationwide, on average.An analysis by NHBR of the amount 13 locally based, publicly traded companies paid in taxes in fiscal year 2010 shows they had an average effective tax rate of 24 percent. Over the last three years, the average rate was 30 percent.Using the companies' own analyses of their effective tax rates, the average rate was 26 percent in fiscal 2010, and 19 percent over three years.Nationally, the rate paid by public corporations is even smaller. According to one study, the effective tax rate has shrunk to close to 10 percent.One thing is clear. Despite media focus on the few companies that manage to get away without paying any taxes year after year, most companies do pay taxes, and while it may not be at the 35 percent rate, it does add up to a substantial amount of money.For instance, those 13 public companies in New Hampshire alone - on average - paid over $13.7 million each in fiscal year 2010.Some companies, like Merrimack-based GT Advanced Technologies, ended up paying $74.5 million in that year, or more than half of its income. And while a few companies, didn't pay a lot -- like Unitil, which wound up with a $6 million credit - there were a pretty good reasons for that.Indeed, as a public utility, Unitil argues that avoiding federal taxes is in the public interest."Our goal should be that we pay zero taxes, because if we pay taxes, the ratepayers are going to pay it," said Jonathan Giegerich, corporate tax specialist with the Hampton-based company. "What you want them to do is pay property taxes, and we are the largest property-tax payer in most communities."But critics say that when corporations avoid paying federal taxes, it means that individuals have to pay more, or that the U.S. treasury is so drained that the nation has to borrow more money to raise revenue.But many companies say that the 35 percent corporate federal tax rate is too high. In fact, several Republican presidential candidates want to do away with it altogether or reduce it considerably. Others point to other industrial countries and argue that the U.S. tax rate on the largest corporations is much higher.What's the method?Those debates will be left to others. NHBR decided to look at what locally based corporations actually pay, and how they avoid paying more.Figuring out a tax rate is a complicated matter, involving what should be counted toward income and taxes, and whether the method looks at what is paid or what is owed.The method can make a difference. While, on average, there is not a substantial disparity in the effective tax rates, there are wild swings from company to company, thanks to some special circumstances.Here are the basic arguments over method:In their annual filings, corporations figure out their effective tax rate internally, and they often include what they pay to states and localities (net of deduction). Finally, and perhaps most crucially, they include deferred taxes -- what they think they will owe in future years based on this year's tax liabilities and assets. Current taxes are an estimate of what they actually will pay in the current tax year.Even the current tax figure is slightly different than the actual amount the company paid at tax time. That number would be on confidential tax returns, and not usually reported in public filings. But the "current" figure is usually the company's best public estimate of what it would actually pay that year, at the time of its annual filing with the Securities and Exchange Commission.Companies argue that by including deferred taxes in figuring out an effective tax rate, there will be fewer swings in that rate from year to year, and shareholders get a better idea of what it pays in taxes.Critics, however, argue that only the current tax should be used because companies are never really sure if they will pay the "deferred" tax or get that deferred tax benefit, since laws and interpretation of laws change from year to year. Thus, a company's stated effective tax rate often changes after it realizes that it won't get the tax break it was expecting from previous years, or that it has just won a case with the IRS, so it can now record as a tax benefit deferred taxes that were too uncertain to be counted in the past.Indeed, in some cases, companies manage getting out of paying deferred taxes forever, so the published effective tax rate masks the fact they are actually paying far less in taxes each year.Critics -- such as US Uncut, which targets what it calls "corporate tax cheats" -- also argue that the focus should be on the amount being paid to the federal government alone, not whether the company is paying its fair share in Greece. So its reports examine a company's pretax income in the United States, and compare it to what is paid in the federal taxes, all of which can usually be found in the company's 10-K filing.NHBR used both the critics' method of looking at tax rates as well as the method used by the companies themselves. In addition, NHBR sought out comments, via email and phone, from the companies under examination. In addition, the companies were sent the spreadsheets and calculations used by NHBR.Most didn't reply, perhaps feeling that they have said enough on the subject in their technical notes in their annual report.One company, GT Advanced Technologies, simply said the method was "accurate." But a few companies responded in more detail, listing some of the same objections that have been brought up at the national level about these methods.Bottomline Technologies Inc. (EPAY)Fiscal Year 2011 (ended 6/30/2011): Pretax federal income (loss): $5 million Federal tax (refund): ($350,000) NHBR-determined tax rate: -7% Company-determined tax rate: -244.3%Fiscal Year 2009-2011: Pretax federal income (loss): (-$415,000) Federal tax (refund): (-$547,000) NHBR-determined tax rate: 132% Company-determined tax rate: -66%Over the three years, the company lost $415,000 in the United States and had a federal tax benefit of over $130,000 more than it lost. Last year, the company made about $5 million, yet received a $350,000 benefit. How did this happen?Calls to the company were not returned, but, according to its annual report, Bottomline recognized a huge tax benefit in the United States ($27.4 million), because it started making more money than it previously thought. Previously, the company thought it would never be able to deduct prior losses. Now -- thanks partly to a deal it struck with Bank of America -- the company thinks it will be profitable for years to come and is reasonably certain it will be able to deduct those losses. Indeed, it was able to deduct $7.8 million against its current taxes. Thanks to that, and other credits, the company thinks it will receive a refund in fiscal 2011 as well, even though it made $5 million in the United States and about twice that amount worldwide.GT Advanced Technologies (GTAT) Fiscal Year 2011 (ended 4/2/2011): Pretax federal income (loss): $134 million Federal tax (refund): $38.895 million NHBR-determined tax rate: 29% Company-determined tax rate: 35.4%Fiscal Year 2009-2011: Pretax federal income (loss): $553 million Federal tax (refund): $135 million NHBR-determined tax rate: 35% Company-determined tax rate: (3-yr. average): 37%You would think that GT Advanced Technologies could get out of paying taxes. The company sells mostly to Asia, and thus could take advantage of various tax breaks by using offshore subsidiaries. It's also in the clean energy business, which has been a magnet for tax breaks as of late. Yet, any way it is calculated, the company pays close to the statutory tax rate, if not above. In 2010, it ended up paying 61 percent on $140 million in profits.The company expects, however, that its tax rate will go down mainly due "to proportionally higher expected levels of income in lower-tax jurisdictions as a result of the Company's continued transition of its global operations center to Hong Kong."One tax break the company can't use is deducting previous losses. The company has been profitable ever since it went public, and the companies it buys are profitable as well.iCAD Inc. (ICAD)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): ($6 million) Federal tax (refund): $0 NHBR-determined tax rate: 0% Company-determined rate: 0%Fiscal Year 2008-2010: Pretax federal income (loss): ($4 million) Federal tax (refund): $89,032 NHBR-determined tax rate: -2% Company-determined tax rate: 2.43%iCAD only had one profitable year among the three under study, so like White Mountains its numbers are skewed. However, in the one year the company made a profit (2008), it earned $5 million before taxes and paid $145,000 in taxes. That comes out to a 3 percent tax rate. (The company calculates the rate at 5.1 percent.) Of course, iCAD only received 3 percent back (about $56,000) in 2009, after a pretax loss of about $2 million. And it didn't get anything back in 2010 when it lost $6 million. That deferred tax benefit can be written off in another year.iCAD did not get back to NHBR for this article, but in its 10K filing, the company explained that tax benefit in 2009 had to do with the research and development tax credit. The company was also able to take advantage of losses in other years.At the end of 2010, the company had some $76 million in net operating loss carryforwards. Some of that loss (about $9.5 million) had to do with the prior losses of Xoft, a company it had acquired. Right now, it can use those losses to offset tax liabilities totaling $1.17 million. The company is worried that all of those deferred tax benefits may never be utilized, as the company may not make enough money soon enough to use all of them.Micronetics (NOIZ)Fiscal Year 2011 (ended 3/31/11): Pretax federal income (loss): $2 million Federal tax (refund): $522,000 NHBR-determined tax rate: 24% Company-determined rate: 34%Fiscal Year 2009-2011: Pretax federal income (loss): ($7 million) Federal tax (refund): $1.12 million NHBR-determined tax rate: -16% Company-determined rate: 29.2%No matter what the figures say, Micronetics - which did not respond to NHBR inquiries -- paid its share fair of taxes. It ended up paying more than $680,000 on $2 million of income in 2010 - after coming off an $11 million loss in 2009, when it only received an $80,000 refund. In fiscal 2011, the company paid another $500,000 in taxes on $2 million in income.While there will be a deferred tax refund of $1.5 million, it is uncertain that the company will be able to take all of that, thus it had to write off $111,000 in 2011 and $68,000 in 2010. When that is taken into account, the company's effective tax rate goes up, thus putting it higher than NHBR's calculation.New Hampshire Thrift Bancshares (NHTB)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $11 million Federal tax (refund): $4 million NHBR-determined tax rate: 32% Company-determined tax rate: 30.8%Fiscal Year 2008-2010: Pretax federal income (loss): $29 million Federal tax (refund): $11.3 million NHBR-determined tax rate: 39% Company-determined tax rate: 30.1%There are no wild swings with NHTB, one of the few locally based banks that is publicly held. The reason that the company's effective tax rate (including deferrals) is slightly lower than the statutory rate (in this case, 34 percent) is because of some tax-exempt income, a deduction on dividends received and some federal tax credits.PC Connection (PCCC)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $36 million Federal tax (refund): $11 million NHBR-determined tax rate: 31% Company-determined tax rate: 40.2%Fiscal Year 2008-2010: Pretax federal income (loss): $56 million Federal tax (refund): $19.9 million NHBR-determined tax rate: 39% Company-determined tax rate: 54.4%Although PC Connection either approached or exceeded the statuary corporate tax rate, CFO Jack Ferguson was quick to criticize what he said was NHBR's "inference that corporations may not be paying their fair share of federal taxes.""Focusing solely on current federal taxes is, in our view, an over-simplification of a company's total tax obligation, and this "cash-basis" approach could yield erratic results from one year to the next," he said.Ferguson defended including deferred taxes (which gives PC Connection a much higher effective tax rate) because they are eventually paid, and are accepted by the Securities and Exchange Commission.He also took issue with averaging the company's own estimation of its effective tax rate over three years in comparison to NHBR's adding up the underlying numbers and coming up with its own three-year effective tax rate. (Both figures in this case show that PC Connection has been paying more than the 35 percent rate.)Pennichuck Corp. (PNNW)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $6 million Federal tax (refund): $1.9 million NHBR-determined tax rate: 34% Company-determined tax rate: 38.8%Fiscal Year 2008-2010: Pretax federal income (loss): $16 million Federal tax (refund): $5.6 million NHBR-determined tax rate: 30% Company-determined tax rate: -38.3%The company said that its statutory tax rate is a bit higher than most utilities at 39.6 percent. The main reason its effective rate isn't as high as its statutory rate is because of a 2008 selloff of several parcels of land for development. Those lands are taxed at the state level via an LLC (of which Pennichuck is a part-owner), and because of that distinction, the company has a slightly smaller percentage of income taxes than it would otherwise.Presstek Inc. (PRST)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): ($7 million) Federal tax (refund): $144,000 NHBR-determined tax rate: -2% Company-determined rate: -31%Fiscal Year 2008-2010: Pretax federal income (loss): ($35 million) Federal tax (refund): $205,000 NHBR-determined tax rate: -1% Company-determined tax rate: -11.3%Presstek, like iCAD, only made money in one of the three years examined -- 2008 -- when it paid $293,000 in taxes on about $5 million of income, an effective tax rate of 5 percent that year. On the other hand, the company ended up paying $144,000 in taxes in 2010 when it lost about $7 million.Presstek did not respond to NHBR for the article, but according to its annual filing, the company had net operating loss carryforwards of $102.3 million at the beginning of 2011. But about $61 million of that was generated from tax deductions from stock-based compensation. It will be able to use some $24.6 million to reduce taxes payable. Presstek was also able to use research and development carryforwards of $3.1 million.Standex (SXI)Fiscal Year 2011 (ended 6/30/2011): Pretax federal income (loss): $25 million Federal tax (refund): $8.5 million NHBR-determined tax rate: 34% Company-determined tax rate: 27.9%Fiscal Year 2009-2011: Pretax Fed income (loss): $42 million Federal tax (refund): $14 million NHBR-determined tax rate: 33% Company-determined tax rate: 32%Standex pays very close to the effective tax rate, according to NHBR's calculations and its own. The company paid $14 million in taxes on $42 million in income. While the company didn't respond to NHBR inquiries, it offers a detailed explanation in its annual report.As with other companies, the tax rate it published changed from year to year because legal interpretations changed. For instance, in 2011, it listed tax benefits of about $800,000 -- reversal of income tax contingency reserves that were determined to be no longer needed; retroactive extension of the research & development tax credit; and a change in the estimated state rate used to calculate deferred balances.In 2010, it received a benefit of $1.1 million related to foreign loss carryforwards "whose recovery was assessed as more likely than not." And in 2009 it got a $1.7 million benefit -- "the reversal of the deferred tax liability that was no longer required due to a change in the U.S. tax classification of one of our foreign entities."Sturm, Ruger & Co. (RGR)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $41 million Federal tax (refund): $11.7 million NHBR-determined tax rate: 28% Company-determined rate: 36%Fiscal Year 2008-2010: Pretax federal income (loss): $96 million Federal tax (refund): $28.5 million NHBR-determined tax rate: 30% Company-determined rate: -37.3%Sturm Ruger paid millions of dollars of taxes, no doubt about that. Whether the company's effective tax rate was above or below 35 percent, depends on the method of calculation that's employed.The company (which also did not reply to questions about its taxes) did receive a tax break in 2010, according to its annual report, thanks to the an increased benefit from the American Jobs Creation Act of 2004, but the company says that brought its effective tax rate down from 38 percent in 2009, to 36 percent. The company's rate is higher mainly because it adds on its state taxes (after the federal deduction) as part of effective rate, a standard practice.But it gets an annual "domestic production activities deduction" of about $2.7 million year, which lowers the rate. Sturm Ruger also has a deferred tax refund of $1.4 million relating to the exercise of executive stock options. Executives who receive these options are reimbursed by the company for their taxes, and that reimbursement is an expense that is not taxed.The Timberland Company (TBL) [Since merged into VF Corp.]Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $60 million Federal tax (refund): $28.5 million NHBR-determined tax rate: 47% Company-determined tax rate: 31.6%Fiscal Year 2008-2010: Pretax federal income (loss): $156 million Federal tax (refund): $63.3 million NHBR-determined tax rate: 41% Company-determined tax rate: 35.4%Among New Hampshire companies, Timberland paid the highest effective rate in calendar year 2010. (GT Advanced Technologies' 61 percent was for the fiscal year that ended in March 2011.) And, overall, the company's tax rate was 41 percent, according to NHBR. In other words, it paid out some $63 million of taxes to the federal government over the past three years.Now that Timberland has been acquired by VF Corp., its effective rate might go down. VF paid at a 48 percent rate in 2010, according to NHBR's reckoning, but VF reports a rate of 25 percent last year, considerably lower than Timberland's reported 31.6 percent.And over three years, VF paid 30 percent in taxes, compared to Timberland's 41 percent, according to NHBR calculations. An average of its own effective tax rate during that time was 26.7 percent, compared to Timberland's 30 percent.Indeed, VF officials did mention a lower tax rate as one of the advantages of the merger.Unitil Corp. (UTL)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $14 million Federal tax (refund): ($6 million) NHBR-determined tax rate (NHBR): -43% Company-determined rate: 32%Fiscal Year 2008-2010: Pretax federal income (loss): $42 million Federal tax (refund): ($12.16 million) NHBR-determined tax rate: -29% Company-determined tax rate: 33.4%Under the method used by NHBR, Unitil has the lowest tax rate among all New Hampshire-based public corporations. It also has the largest difference in resulting effective tax rate. But this is because several factors affect utilities more than other companies, including storms and generous depreciation allowances for the company's large capital infrastructure.Utilities can write off the expenses of a storm for tax purposes immediately, but by law they must spread out the cost over years. That's because any large expense would be passed onto the ratepayers, which would create a "rate shock" if included all at once. So when Unitil incurs a large expense it deducts it for the year, while delaying billing the ratepayers.In addition, Unitil has about $50 million in capital assets, but those assets depreciate. To encourage investment in such infrastructure, the federal government allows utilities to accelerate depreciation for tax purposes. Instead of 6 percent a year, it goes up to 50 percent, meaning a $500,000 write-off, but on the books depreciation happens more gradually.It will all even out in the long run, because there will be other years in which tax depreciation would be smaller than the real depreciation or there are no storm costs to write off, even though the company may still be paying for previous costs. Unitil won't be able to avoid eventually paying those deferred taxes."We are highly regulated, so there is less wiggle room in what we can do," said Jonathan Giegerich, corporate tax specialist with the Hampton-based company. White Mountains Insurance Group (WTM)Fiscal Year 2010 (ended 12/31/10): Pretax federal income (loss): $66 million. Federal tax (refund): $48 million NHBR-determined tax rate: 73% Company-determined tax rate (WTM): 14%Fiscal Year 2008-2010: Pretax federal income (loss): ($490 million) Federal tax (refund): $42.1 million NHBR-determined tax rate: -9% Company-determined tax rate: -9%White Mountains is another company with larger fluctuations year to year and discrepancies between results depending on the method, and it has a negative three-year tax rate, even though during that time it paid $42.1 million taxes. (That's because it lost money over the three years, due to a horrible 2008, so paying taxes on a loss equals a negative tax rate.)But all this is to be expected of insurance companies, said Jennifer Pitts, the company's corporate secretary."A majority of an insurance company's income comes from investment income and unrealized gains and losses are not taxable until the gains and losses are realized (the securities are sold or matured)," said Pitts.Insurance companies also are allowed to deduct the present value of their reserves for losses (claims) and they must pay tax on premium income before it is earned, Pitts said.Pitts gave NHBR the company's own version of its current U.S. federal tax rate, and came up with an even lower effective rate of -23 percent (and on cumulative income and cumulative current tax expense of -172 percent), both of which "makes no sense whatsoever," Pitts said.Still, there also are problems with using deferred taxes. The company's worldwide effective tax rate, which is reported in its annual statement, is also distorted. The company thought it had a $162 million tax benefit thanks to a previous net loss carryforward held by a subsidiary in Luxembourg. The problem is that Sweden enacted tax legislation that might wipe out the benefit, meaning that benefit may not exist, and thus there was a drastic change in its deferred benefit -- though, of course, nothing of this relates to how much in taxes the company actually has paid, at least not yet.White Mountains argues using deferred tax liabilities and benefits makes more sense. Under that method, which was demonstrated for the benefit of NHBR, the effective U.S. tax rate over a three-year period (as opposed to the average annual figures reported on the 10-K) is a positive number, 26 percent, though, it is still far lower than the 35 percent federal corporate tax rate. Edit ModuleShow Tags