Elon Musk's US tax bill: $11 billion. Tesla's: $0

Elon Musk has repeatedly bragged (or, perhaps, complained) that he'll pay more in federal taxes for 2021 than anyone has ever paid — about $11 billion. But Tesla apparently won't pay a cent.

Tesla may not plan to pay federal taxes any time in the foreseeable future -- even though the company just reported by far its most profitable year ever. In 2021, Tesla recorded net income of $5.5 billion, and adjusted income of $7.6 billion.

But buried in a footnote of its recent annual financial filing with the Securities and Exchange Commission, Tesla reports that its US operations lost $130 million last year on a pre-tax basis. It claims that all of its pre-tax profits — more than $6 billion worth — came from overseas operations, even though 45% of its revenue came from US sales.

Although Tesla indicates its foreign tax bill came to $839 million, its state tax bill was only $9 million. And its federal tax bill was zero.

"That defies common sense, but it does not defy the US tax code," said Martin Sullivan, chief economist for Tax Analysts, a nonprofit tax publisher, and an expert on US corporate tax practices.

Moving profits overseas — on paper

Sullivan said he believes the $130 million loss on its US operations is most likely due to a common practice for US multinational corporations: structuring their operations so that overseas subsidiaries are the ones reporting income, leaving the US operation to have little or no taxable income to report.

For example, a company can assign its intellectual property to one of those foreign entities, and charge its US unit a fee for using that property. And thus, the foreign operation is very profitable, while the US company — burdened with "costs" to the company itself — reports either a loss or very little income.

"It's a US multinational thing. It's very common. It's almost malpractice not to do that," said Sullivan.

A recent report from the US Department of the Treasury found 61% of the international profits of US multinational companies are booked in seven small countries -- Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland -- known as tax havens. It's a practice that many elected officials and the Biden administration have vowed to crack down on.

"Tesla and other giant corporations have long used scams and loopholes to help them get out of paying taxes -- that has to stop," said Sen. Elizabeth Warren, a frequent critic of Musk. "Democrats are working to end Republican tax cuts for corporations shifting profits and jobs overseas."

However, Congress has so far failed to take action to stop it.

The financial filing by Tesla doesn't spell out what it did exactly, though. For example, it doesn't say which country or countries it made its profit in while reporting a US loss. And Tesla declined to respond to a question about its filing.

Tesla doesn't expect to pay US taxes any time soon

Considering the substantial financial help that Tesla has long received from government support for its electric cars, the company doesn't have to use a shell game of offshoring its profits to avoid paying taxes. Instead, it could use past losses to shelter its current income from any tax bill.

Once again, this is a common practice for companies that lose money: losses result in a future tax break.

Tech companies that lose money for years before turning a profit — such as Amazon (AMZN) — have used this technique. So have old line companies that have financial problems, such as all US airlines, which will probably not have to pay taxes for years to come after recording billions of dollars in losses during the pandemic — despite receiving billions in federal help.

Similarly, Tesla's US automaking competitors lost so much money in the first decade of this century that General Motors (GM) and Chrysler needed government bailouts. Despite those bailouts, neither company paid taxes for several years once they were again profitable.

Past losses are a huge and very valuable future tax benefit known as "net operating loss carry-forwards."

Tesla was losing money for more than a decade before it finally started reporting net income in 2020. Those were real losses, which occurred when the costs of developing and building its cars in its early years far outstripped the money it could sell them for. It did so with the expectation that it would turn a profit in the future as demand increased and costs declined. That's exactly what happened.

But, in running up billions of dollars in losses, Tesla was able to accumulate net operating loss carry-forwards that it could use in the future.

Still, Tesla disclosed in this week's financial filing that it did not use any of those past losses to shield current income from taxes. And it took a bookkeeping maneuver that suggests it doesn't know if it will ever have to use those past losses to shield its US income.

Tesla is rather bullish about its future, expecting annual sales growth of 50% for the foreseeable future. If it believed that its pre-tax losses in its domestic operations was temporary, it likely would not have not taken that step of reducing the value of those past losses as a way of eliminating future US taxes, according to Sullivan.

Is Tesla losing money at home?

There's another possible reason that Tesla might have reported a pre-tax loss on its US operations: — one that isn't as much an accounting maneuver designed to lower taxes as it is a warning sign about the viability of the company. Perhaps it still is losing money on the cars it is selling in the United States, and it can only make money using the lower costs of a relatively new factory in Shanghai, China.

That's what one of Tesla's most fervent critics and doubters believes. Gordon Johnson of GLJ Research, points out that Tesla was losing money overall until after it started producing cars in Shanghai in October 2019. He believes that investors are giving Tesla too much credit for profits in the US that he doesn't believe are real.

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"I think it's a massive deal," he said about Tesla's filing this week. "They effectively said they don't plan on utilizing any of the net loss carry forwards. That means their US operations are losing money. It's an argument we've made over and over again. Outside of China, Tesla loses money."

But other analysts who have examined its books insist Tesla's profits, both at home and overseas, are real, no matter what its US tax forms say.

Johnson said if he's wrong, it's up to Tesla to be more transparent.

"The reality is, until they provide disclosure, both explanations could be right," he said.

Musk's rare big tax bill

Musk has a history of using the US tax code to pay little or no personal federal income taxes. A report from ProPublica shows that for 2018 Musk and many other Americans near the top of the world's richest people paid no income tax.

In Musk's case, he receives no salary from Tesla, only very valuable stock options, as a form of compensation. And under US tax code he doesn't have to pay taxes on those options until he exercises them to buy shares of stock at a fraction of their current value.

He also would have to pay taxes if he sells shares he already held because of his earlier investment in the company, which he has rarely done. But he did that last year as well.

Musk has not exercised most of the options that he holds. But he had options to buy 22.9 million shares that were due to expire in August 2022, and started exercising those options to buy additional shares late last year.

In total, he spent $142.6 million to purchase shares worth $23.6 billion, giving him $23.5 billion in in taxable income, taxable for 2021 at a federal rate of about 41%.

Musk also sold a small fraction of the additional shares he already owned, sales that fetched a taxable $5.8 billion at a lower capital gains rate.

Together those stock trades likely resulted in roughly an $11 billion federal tax bill, which he has tweeted about.

But that could well be the last time for years to come that he's paying a substantial federal tax, unless Congress passes one of the various proposals to tax the net worth of the nation's wealthiest individuals, rather than just their income. Several Democratic Senators, including Elizabeth Warren, Bernie Sanders and Ron Wyden have proposed that, but so far it hasn't come close to passing.

Not surprisingly, Musk opposes such efforts, and has mocked all three senators on Twitter.

The options Musk exercised last year that produced the massive tax bill aren't the end of his options. This week's financial filing from Tesla discloses that Musk received another 8.4 million options, bringing his total to 67.5 million.

But none of those options expire until 2028. And thus it'll probably be five years before he starts to exercise those options, unless he leaves the company before then.

If he is once again paying zero federal taxes, chances are good that his tax bill and his primary company's tax bill will be the same during those five years.