Some NH firms paid little or no income tax in 2018

The only things that are certain are death and taxes, right?

Well, while death may be certain, that’s not necessarily true when it comes to the corporate income tax, since it’s often not certain what a company owes and what it will owe in the future.

When it comes to the amount a company pays, the answer is usually the same: as little as possible. And in the case of about 10 companies based in or with substantial operations in the Granite State, only three actually paid more than 1% of their U.S. income to Uncle Sam. And three didn’t pay anything at all.

Those companies are hardly unique. “Not a Dime,” a recent study by the Institute on Taxation and Economic Policy (ITEP), found that at least 60 of the Fortune 500 companies paid no taxes to the federal government in 2018, even though they made substantial profits. (There may be more, but the financial filings for the companies are so complicated, and often very vague, that the group is still working through the rest to figure out their effective tax rates.)

It isn’t just because of the recent tax act passed at the end of 2017. Corporations have been figuring out ways to avoid paying taxes for decades. Now they just have to pay a lesser rate on what income does count.

The reasons are many. Some companies didn’t have any U.S. income, at least on paper. Others pay their executives heavily in stock options, which they can count as expenses. Others invest so much in their company that they can depreciate it every year as a one-time expense. Some earn their income overseas, and only pay taxes if they bring that money home.

Theoretically, a company eventually has to pay Uncle Sam. Those tax liabilities are often listed as deferred taxes. That deferred number is included in the “provision for income taxes” figure in a financial statement. That provision figure also includes state income taxes (in New Hampshire, that would be the business profits tax and the business enterprise tax) and income taxes in different countries. All that gets added together, compared with the company’s net income (before taxes) to come up with an effective tax rate.

Actual payments

A company’s stated effective tax rate is somewhat different than the rate that companies are supposed to pay. It was 35% before the Tax Cuts and Jobs Act went into effect in December 2017, and it was 21% afterward, but it still sounds like they are paying a good chunk.

For instance, of the dozen companies examined by NH Business Review, the effective tax rate averaged 38.5% in 2017 (when the rate was 35%) and 21.35% in 2018 (when the rate was 21%). In other words, it seems as if, on the whole, the companies are paying what they should be — what some people might call “their fair share.”

But if you look at what the companies actually paid the federal government — not what they might pay in the future — and compared it to U.S. pretax income, the rate drops closer to 0% in most cases. (The average of the New Hampshire companies in 2018 was 19%, thanks to a large payment with very little income by Standex International. Otherwise it would be 6.7%.) In 2017, that average was 5.2%.

The ITEP report focused on what was actually paid, not what might be paid.

It doesn’t make sense to count deferred taxes, said Matt Gardner, senior fellow at ITEP, “because those deferred taxes are often deferred indefinitely. The effective tax rate that they put in their financial statements is not a meaningful number. The fact is a lot of them don’t pay federal taxes year after year.”

Needless to say, that’s not a universally accepted opinion, especially for those who specialize in arcane tax laws to figure out how much a company legally must pay.

“This is an age-old debate about the difference between tax accounting and GAAP [generally accepted accounting principles],” said William Ardinger of Rath, Young & Pignatelli, one of the state’s best-known tax attorneys.

Federal tax rules, for instance, let you take your entire depreciation up front, even though the actual depreciation occurs over a number of years. So that would enable some businesses to pay no taxes one year, but then end up paying a little extra every year thereafter.

Since companies are always buying things that depreciate, keeping track of all this is complicated, but “the day of reckoning will come,” said Ardinger, who pointed out that day did come for some companies when the 2017 Tax Cuts and Jobs Act did tax repatriated foreign income, a one-time liability that upped some companies 2018 bill, even though their income as a whole was taxed at a lower rate.

‘Inherent uncertainty’

Critics like ITEP are not alone in questioning how much of those deferred taxes will be paid. Indeed, most companies — in their own financial statements — include boilerplate caveats on their future tax liability, which is adjusted just about every year.

“In the ordinary course of business, there is inherent uncertainty in determining assets and liabilities related to income tax balances,” reads one such statement by Rochester-based Albany International Corp., contained in the company’s annual financial filing. “We exercise significant judgment in order to estimate taxes payable or receivable in future periods.”

Even Ardinger can’t guarantee that deferred taxes will all be paid, but he also said it would be a mistake — almost a criminal one when estimating a company’s value — to ignore them.

“The reality is grayer than both advocates like me and ITEP would try to make it,” he said.

Despite Ardinger’s reservations, NH Business Review used ITEP’s calculation method for Fortune 500 companies to look at the tax liability of 10 public companies located or with substantial ties in the state.

A few companies paid taxes, no matter how you look at it. Sturm, Ruger & Co., Connection and Standex International paid $17.5 million, $16.6 million and $11 million, respectively, to the IRS, according to their filings, with federal tax rates of 27%, 20% and 17%, respectively. But they were the exception.

Here are the companies that hardly paid any federal taxes last year.

Albany International

Albany, an industrial materials company based in Rochester, paid $304,000 in 2018 taxes to the federal government on almost $42 million of U.S. income, an effective tax rate of 0.8%. This is a far cry from the 28% claimed in the company’s annual report, but that calculation includes nearly $5 million in state taxes, $21 million in foreign taxes and another $5.4 million in deferred taxes.

The company did pay a lot more to the federal government in 2017 and 2016 ($1.5 million and $3.7 million), even though it posted a $5.8 million U.S. loss in 2017 and only an $8.6 million profit in 2016.

One reason it paid so little this go-round is that it paid too much in prior years. And the tax rate is higher now in most of the 18 countries in which the company operates overseas. Albany also has a huge tax asset — some $103.2 million in net operating loss carryforwards and another $24 million in a foreign tax credit carryforward — that could be used to lower liability in future years. Messages left with Albany were not returned.

Bottomline Technologies

The Portsmouth-based developer and provider of financial technology services received a federal refund of $673,000 in 2018, paid $41,000 in taxes in 2017 and received a $362,000 refund in 2016. The reason seems simple enough: The company posted losses in all three years. But you wouldn’t get that impression by reading the company’s earnings press releases or listening to the earnings call afterward. That’s because Bottomline emphasized its core income, which excludes paper losses, like executive compensation.

For instance, the company experienced a slight pretax loss in the United States of $29,000, but its core net income was nearly $50 million. That’s because the net income includes $34 million in non-cash executive compensation — stock awards and options — and a $22 million amortization of acquisition-related intangible assets.

In other words, the company made money, but wrote most of it off in executive stock options and paper losses, meaning it didn’t have to pay taxes on that money.

The move was even more stark in 2017, when the company’s U.S. loss was $25 million and its posted net loss was $33 million. But that latter figure included $32 million in executive compensation, $24 million in acquisition adjustments and nearly $10 million in goodwill impairment. Without those and other adjustments, the company’s core net income was $37.7 million. But Bottomline didn’t have to pay any taxes on it, and indeed got a tax benefit that it would be able to carry over in future years. The company did not respond to a request for comment.

iCAD

The losses for iCAD, the Nashua-based medical device manufacturer, were all too real. The firm posted some $33 million in losses over the last three years, resulting in no federal tax liability. If iCAD ever does start making money, it has a net operating loss carryforward totaling $135 million, but it can’t really count that as an asset because there is a good chance that all but $7 million of those losses will expire before the company becomes profitable.

Planet Fitness

Planet Fitness, the national gym franchise based in Hampton, paid $178,000 in federal corporate income taxes last year, yet the company reported $129 million of pretax income. In a written statement to NH Business Review, the company said, “Federal tax paid by Planet Fitness Inc. is not an accurate representation of the federal tax that is actually paid to the government on the company’s taxable income.”

Planet Fitness is a hybrid company. When it went public in 2015, some of the original owners — through an entity called Pla-Fit Holdings — hung on to their interests, so the company is in essence a partnership, with one part paying corporate income taxes, and the other part paying a pass-through tax.

About $15 million of the company’s net income is attributed to Pla-Fit Holdings, leaving $114 million for common stock shareholders. The company only paid a fifth of a percent of that in taxes.

But in 2018, Planet Fitness also paid another $30 million in taxes indirectly. That’s because when it went public, the company agreed to reimburse the owners of Pla-Fit Holdings 85% of its future tax liability. Yet it is difficult to break out what portion of that money actually gets to the IRS, what gets paid out in state taxes and what is deferred. Indeed, in 2017, Planet Fitness adjusted that future liability by $334 million due to changes in the federal tax rate.

Sprague Resources

Sprague Resources is also a hybrid — a publicly traded limited partnership that doesn‘t pay a corporate income tax. Instead, the company’s partners pay taxes on the income that passes though the corporation. But one subsidiary, Sprague Energy Solutions Inc., is a corporation and does pay federal income taxes — about $118,000 in 2018. That subsidiary, it turns out, gets all but $14.4 million of the company’s pretax income, according to the company’s financial filing. Based on the breakdown provided, approximately $50 million of its total income is in the United States, meaning that the subsidiary ended up paying a fifth of a percent on U.S. income to the federal government. (The company paid about $4.7 million in foreign income taxes, but that is because some foreign countries, including Canada, apply a corporate income tax to a partnership.)

Unitil

Unitil paid no federal taxes even though it had pretax earnings of $41.4 million, almost all of it in the U.S. That’s because the Hampton-based gas and electric utility spends so much money each year to repair and maintain the system. (Some 13 of the 60 companies that didn’t pay taxes in the ITEP study are utilities)

“Unitil’s budget for such work in 2019 is approximately $125 million,” wrote Unitil spokesperson Alec O’Meara to NH Business Review. Such a large capital budget means that the company can write off its tax liability ahead of time. “The taxes are still due to be paid,” he wrote, “but these deferred taxes will be paid in future periods when the accelerated deductions are used up.” Unitil is now up to $98 million in deferred taxes.

O’Meara also pointed out that “utilities are usually among the highest property tax payers in communities it serves,” and any tax savings gets passed on to the ratepayers.

Not all utilities skipped out on paying federal taxes last year. Eversource ended up paying Uncle Sam $106 million in taxes in 2018, about 8.1% of its pretax income.

White Mountains Insurance

White Mountains Insurance Group paid the IRS $100,000 in 2018, based on a pretax domestic loss of $148 million, for a pretty straightforward reason: How can you pay income taxes when you don’t have any income? But White Mountains is a particularly tricky case, since the company is based in Bermuda with corporate offices in Hanover, NH. Thus the parent company “and our non-U.S. subsidiaries operate in a manner such that none of these companies should be subject to U.S. tax.”

So any federal taxes would only be related to its U.S. income, which — in the last three years — only resulted in losses.

In 2018, the entire company lost money as well, but in 2017, the company as a whole reported pretax profit of $7.8 million, while the U.S. subsidiary lost $63.5 million. White Mountains ended up paying $300,000 in federal taxes that year.