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The sibling comment regarding avoiding a taxable income is correct. When a company makes a profit, it pays taxes on that income. The dividends are then either
by alehul 9y ago
The sibling comment regarding avoiding a taxable income is correct.
When a company makes a profit, it pays taxes on that income. The dividends are then either 1. distributed proportionally to the shareholders, or 2. reinvested into the company.
The general idea is that reinvestment will generate more profit in the long term. In this case, the company reinvests the income into operations and growth during the next fiscal period and onwards. This method of reinvestment, however, still requires some taxes to be paid on the income.
As an alternative, a company can fill their income statement each quarter with expenses that will ~match their income. This way, they're essentially reinvesting in their operations and growth just the same, however they don't have to pay the taxes if the expenses are generated in the same quarter. This method makes the company look unprofitable, but in reality is merely an accounting choice (and arguably, a good one).
A random article I found that explains some of the strategy:
http://www.businessinsider.com/analysts-wrong-about-amazon-profit-2015-1 http://www.businessinsider.com/analysts-wrong-about-amazon-p...
- kgwgk 9y agoGood luck getting the IRS to accept that "good" accounting choice. In fact the reported statements can be different from those used to calculate the actual taxes paid. But even if the SEC is more flexible, there are still limits on what can be done. They are still reporting capex much higher than net income, if they expensed everything off they would be reporting billions in losses every quarter.
- alehul 9y agoYou're right that Amazon has higher capex than income, however this has been intentional; I haven't been in finance for a while, and apparently this is how they're doing it now, but the main point holds true of purposely avoiding income. From an a16z partner: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. Source: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
- kgwgk 9y agoIn case it's not clear, capex doesn't avoid income (at least not now). Capex is paid for with (after tax) profits, debt or new capital. Of course depreciation will reduce profits in the future, maybe you mean that. There is a bit of flexibility in when things are expensed, but there are rules. You cannot buy a building and expense it today. On the other hand, you can spend a lot in marketing or some forms of R&D and you have to expense them now (they cannot be capitalised, even though in fact the return on the investment will come in the future).