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Zuckerberg's taxes on IPO? How about $2 billion

The Facebook chief may be on the hook for $2 billion in taxes with his company going public. But he's not necessarily all that upset about it, because Facebook in turn gets a tax deduction.

Edward Moyer Senior Editor
Edward Moyer is a senior editor at CNET and a many-year veteran of the writing and editing world. He enjoys taking sentences apart and putting them back together. He also likes making them from scratch. ¶ For nearly a quarter of a century, he's edited and written stories about various aspects of the technology world, from the US National Security Agency's controversial spying techniques to historic NASA space missions to 3D-printed works of fine art. Before that, he wrote about movies, musicians, artists and subcultures.
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Facebook chief Mark Zuckerberg may be on the hook for $2 billion in taxes with his company going public. But he's not necessarily all that upset about it.

As The New York Times' David Kocieniewski reports, the 27-year-old CEO plans to exercise options worth about $5 billion, and with such transactions generally being treated by the IRS as regular compensation, Zuckerberg would be liable for the $2 billion figure--perhaps one of the highest tax payouts by an individual ever.

Zuckerberg owns 413 million B shares of Facebook stock and was granted options in 2005 to buy 120 million shares at 6 cents apiece. The shares are now worth more than $40 each.

The federal tax rate on regular compensation maxes out at 35 percent, so an exercise of $5 billion in options would mean about $1.5 billion in federal income taxes, and another $500 million in California income tax, Kocieniewski reports.

However, the IRS lets companies take a mirror deduction for employees' option compensation. That means Zuckerberg's Facebook could see its tax bill for last year covered by the deduction (the company raked in $1 billion in profits in 2011). And the deduction could lead to tax refunds for 2009 and 2010 as well (and reductions in future years), Kocieniewski reports.

And Zuckerberg may be angling for lower personal taxes down the line. The Times says that according to Facebook's Securities and Exchange Commission filings, Zuckerberg plans to exercise all the options and sell enough shares to cover taxes. He could then retain the rest of the shares for more than a year and be charged the lower capital gains rate--15 percent--on any additional earnings.

The Times reports that some Congress members say the mirror-deduction allowance is misguided because it lets companies deduct the value of options when exercised, which is often higher than the expense the company originally claimed on its books. The paper quotes Democratic Senator Carl Levin of Michigan: "Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation."

Facebook filed its S-1 form with the Securities and Exchange Commission on Wednesday, officially declaring its intent to go public. The company plans to raise $5 billion through the IPO, according to the filing. The last major tech IPO was Google's, which raised $1.9 billion. Zuckerberg is reportedly worth more than $23 billion.

You can check out CNET's complete coverage of Facebook's IPO declaration here.