February 3, 2012 8:08 pm

Facebook chief faces tax bill of $1.5bn

Mark Zuckerberg faces a tax liability of more than $1.5bn this year, vaulting the Facebook co-founder into the leagues of all-time highest taxpayers and leaving a big question mark over his company’s initial public offering.

The taxes will fall due on a vast profit of nearly $5bn that Mr Zuckerberg, 27, plans to take on stock options he was handed in 2005 for acting as Facebook’s chief executive.

While not putting a figure on the amounts at stake, Facebook said this week that Mr Zuckerberg would exercise the options before its initial public offering, which is expected to take place in May, and sell enough shares in the IPO to cover the tax bill on his profits.

He has never sold any of his shares in the company, according to one person familiar with his finances.

News of the Facebook co-founder’s vast impending tax liability comes amid a national debate in the US over whether the country’s top earners are paying enough in taxes. Curiously, while any profits realised from most of Mr Zuckerberg’s $22bn stake in Facebook would also be taxable as capital gains, the portion tied to his options will appear as regular income in his personal tax return.

Mr Zuckerberg’s need to sell shares to cover his personal tax bill will make this a big part of the company’s impending IPO and leave a question over how much cash the company will be able to keep for itself from the deal. It said this week it expected the IPO to raise $5bn, half the amount that Wall Street had expected, though companies often begin with a low figure to stimulate interest among investors before increasing the target amount nearer to the time of a deal.

As so-called “non-qualifying” stock options similar to those handed to other corporate executives, the gains on the Zuckerberg options will be taxed at the top US marginal income tax rate of 35 per cent, said John Barcal, associate professor of accounting at the USC Leventhal School of Accounting.

The Harvard University dropout will also pay a tax of 10 per cent on the profits to the state of California, though he can deduct that from his Federal bill, said Mr Barcal. It will cost Mr Zuckerberg only 6 cents a share to exercise his 120m options, according to the filing Facebook made this week in anticipation of its IPO.

With the stock changing hands in private secondary markets at nearly $40 a share, that is set to leave him with a gain of some $4.8bn. The profit would rise to $6bn if the company reaches the $100bn IPO valuation some of its investors have predicted.

Politicians in Sacramento, California’s state capital, are arguing over how to spend the tax windfall expected from Facebook’s IPO.

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