10 ms·

Something nobody's talking about: OpenAI's losses might actually be attractive to certain investors from a tax perspective. Microsoft and other corporate invest

by jotras 9mo ago

Something nobody's talking about: OpenAI's losses might actually be attractive to certain investors from a tax perspective. Microsoft and other corporate investors can potentially use their share of OpenAI's operating losses to offset their own taxable income through partnership tax treatment. It's basically a tax-advantaged way to fund R&D - you get the loss deductions now while retaining upside optionality later. This is why the "cash burn = value destruction" framing misses the mark. For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields (depending on their bracket and how the structure works). That completely changes the return calculation. The real question isn't "can OpenAI justify its valuation" but rather "what's the blended tax rate of its investor base?" If you're sitting on a pile of profitable cloud revenue like Microsoft, suddenly OpenAI's burn rate starts looking like a pretty efficient way to minimize your tax bill while getting a free option on the AI leader. This also explains why big tech is so eager to invest at nosebleed valuations. They're not just betting on AI upside, they're getting immediate tax benefits that de-risk the whole thing.

rebuilder 9mo ago
It’s hardly a free option, by your numbers it’d be a 20-30% discount.
- thrwaway55 9mo ago
  Sure but if there's no moat would you rather pay 100% or 80% until the credits run out? You reap the 100% spend in the meantime. Not everyone even has the no moat discount.
ludicrousdispla 9mo ago
>> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields So just a loss for governments, or in other words, socializing the losses.
- booi 9mo ago
  Hi, I'm here to hold the bag?
  - chinathrow 9mo ago
    Your pension fund, yes.
    - lotsofpulp 9mo ago
      This comment makes even less sense than jotras’ comment. Pension funds buy shares in businesses such as Microsoft. The money going into the pension fund is not typically a function of the tax paid by companies such as Microsoft, but rather from a combination of actuaries’ recommendations, payroll tax receipts, and politicians’ priorities. Therefore a pension funds’ equity holdings, such as Microsoft, doing well means taxes can be lower.
      - jdiez17 9mo ago
        If only my country (Germany)’s pension fund was capital/stock based.
        lotsofpulp 9mo ago
        Most countries' broadest defined benefit pensions are just simple wealth redistribution schemes from workers to non workers as opposed to being paid from funds that were previously invested. In the USA, Social Security defined benefit pensions are cash from workers today going to non workers today, same as Germany's national scheme (gesetzliche Rentenversicherung?). The other defined benefit benefit pension schemes are what are usually invested in equities, and the investment restrictions section in this document indicate Germany's "occupational pensions" can also invest in equities. (page 12) https://www.aba-online.de/application/files/2816/2945/5946/20210819_Occupational_Pensions_Landscape_in_Germany.pdf https://www.aba-online.de/application/files/2816/2945/5946/2...
  - Groxx 9mo ago
Jare 9mo ago
> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields (depending on their bracket and how the structure works). That completely changes the return calculation I know nothing about finances at this level, so asking like a complete newbie: doesn't that just mean that instead of risking $10B they're risking $7-8B? It is a cheaper bet for sure, but doesn't look to me like a game changer when the range of the bet's outcome goes from 0 to 1000% or more.
- sigmoid10 9mo ago
  It all depends on the actual numbers. Consider this simplified example: If you are offered a deal that requires you to lay down 10 billion today and it has a 5% chance to pay out 150 billion tomorrow, your accountants will tell you not to take this deal because your expected return is -2.5 billion. But if you can offset 3 billion in cost to the tax payer, your expected return suddenly becomes $500 million, making it a good deal that you should take every time.
  - lotsofpulp 9mo ago
    This applies to any spending Microsoft does. What does it have to do with OpenAI? Also, classifying business expenses as "cost to the tax payer" seems less than useful, unless you are a proponent of simply taxing gross receipts. Which has its merits, but then the discussion is about taxing gross receipts versus income with at least some deductible expenses, not anything to do with OpenAI.
  - Fraterkes 9mo ago
    I get that this example is simplified, but doesn’t the maths here change drastically when the 5% changes by even a few percentage points? The error bars on Openais chance of succes are obviously huge, so why would this be attractive to accountants?
    - sigmoid10 9mo ago
      That's why you have armies of accountants rating stuff like this all day long. I'm sure they could show you a highly detailed risk analysis. You also don't count on any specific deal working, you count on the overall statistics being in your favour. That's literally how venture capital works.
danielscrubs 9mo ago
Can you explain it in another way? What you are saying is that instead of loosing 100% they loose 70% and loosing 70% is somehow good? Or are you saying the risk adjusted returns are then 30% better on the downside than previously thought? Because if you are, I think people here are saying the risk is so high that it is a given they will fail.
- gosub100 9mo ago
  Let's say they are paying for "research". The research is very expensive and has a high likelihood of being worthless, but a small likelihood of having value later. So by claiming the financial loss, they can offset the cost of the expensive research by 30%, making it an even more attractive gamble.
pvtmert 9mo ago
Amazon already has not been paying any sort of income tax to the EU. There was a lawsuit in Belgium but Amazon has won that in late-2024 since they had a separate agreement in/with Luxembourg. Speaking for EU, all big tech already not paying taxes one way or another, either using Dublin/Ireland (Google, Amazon, Microsoft, Meta, ...) and Luxembourg (Amazon & Microsoft as far as I can tell) to avoid such corporate/income taxes. Simply possible because all the earnings go back to the U.S. entity in terms of "IP rights".
- lotsofpulp 9mo ago
  > Amazon already has not been paying any sort of income tax to the EU. That should be expected, because https://european-union.europa.eu/priorities-and-actions/actions-topic/taxation_en https://european-union.europa.eu/priorities-and-actions/acti... > The EU does not have a direct role in collecting taxes or setting tax rates. > There was a lawsuit in Belgium but Amazon has won that in late-2024 since they had a separate agreement in/with Luxembourg. Dec 2023. > Speaking for EU, all big tech already not paying taxes one way or another, either using Dublin/Ireland (Google, Amazon, Microsoft, Meta, ...) and Luxembourg (Amazon & Microsoft as far as I can tell) to avoid such corporate/income taxes. Simply possible because all the earnings go back to the U.S. entity in terms of "IP rights". Ireland (due to pressure from EU) closed this in 2020. The amount of tax collected by Ireland quadrupled. See Figure 5 and 6 in link below. https://budgetmodel.wharton.upenn.edu/issues/2024/10/14/the-end-of-the-double-irish https://budgetmodel.wharton.upenn.edu/issues/2024/10/14/the-...
  - benjiro 9mo ago
    > any sort of income tax to the EU. Its clear that OP means "in the EU". > Ireland (due to pressure from EU) closed this in 2020. The amount of tax collected by Ireland quadrupled. See Figure 5 and 6 in link below. And Ireland fought against this tooth and nail. Yes, a country was fighting to have less income. All out of fear that the companies will leave the little tax heaven. Did they leave? No ... > See Figure 5 and 6 in link below. Figure 7 is also interesting if we look at the tax income increase and the outbound.
  - 9mo ago
lenkite 9mo ago
> OpenAI's losses might actually be attractive to certain investors from a tax perspective. OpenAI is anyways seeking Govt Bailout for "National Security" reasons. Wow, I earlier scoffed at "Privatize Profits, Socialize Losses", but this appears to now be Standard Operating Procedure in the U.S. https://www.citizen.org/news/openais-request-for-massive-government-bailout-package-is-pure-corporate-entitlement/ https://www.citizen.org/news/openais-request-for-massive-gov... So the U.S. Taxpayer will effectively pay for it. And not just the U.S. Taxpayer - due to USD reserve currency status, increasing U.S. debt is effectively shared by the world. Make billionaires richer, make the middle class poor. Make the poor destitute. Make the destitute dead. (All USAID cuts)
- alex43578 9mo ago
  There's already a lot that the US taxpayer is on the hook for that's a lot less valuable than a best on the next big thing in software, productivity, and warfare. It shouldn't be the job of the US taxpayer to feed someone that doesn't want to work, study, or pass a drug test, and it absolutely shouldn't be the job of the US taxpayer to feed another country's citizens half a world away.
  - Ar-Curunir 9mo ago
    The modern welfare state is the compromise reached by capitalist democracies to stave off communist revolutions. If you’re going to kill of the welfare part, be ready for the uprising part.
    - nosianu 9mo ago
      That's where the surveillance and the militarized police force(s) come in. Especially the former now has reached extraordinary levels, given that almost all communication now is easily trackable. Compare that to when we still had revolutions, where it was very hard for government to know what is going on, and to find individuals without a huge effort. I think revolutions have become next to impossible, unless it is lead by significant parts of the elite that controls at least part of the apparatus. That's not even counting the far more sophisticated propaganda methods, so that many of the affected people won't even begin to target the actual culprits but are lead to chase shadows, or one another.
Zenst 9mo ago
Whilst that is an option, it wont cover the share price hit from the fallout, which would wipe out more than the debt as when the big domino falls, others will follow as the market panic shifts. So kinda looking at a bank level run on tech companies if they go broke.
sod22 9mo ago
Lmao this is ridiculous. If MSFT really wanted the tax benefits they should’ve just wholly acquired OAI long ago to acquire the financial synergy you speak of.
visarga 9mo ago
> The real question isn't "can OpenAI justify its valuation" but rather "what's the blended tax rate of its investor base?" Was that an organic "it's not A, it's B" or synthetic?
mbesto 9mo ago
None of this is how taxes work.
- gamblor956 9mo ago
  Correct, for tax purposes corporate losses remain with the corporation. Microsoft and the other owners don't get the benefit of OpenAI's losses. At best, they get to write off their investment in OpenAI if the company dissolves, at which point their maximum tax write-off is their capital investment. Note: other people seem to be confused because companies can write off investments in corporate subsidiaries before the subsidiary is dissolved or sold...for book purposes. This creates what is known in the accounting world as a book-tax difference. If you have a few weeks to spare, look up tax provisions...
louiereederson 9mo ago
this is not accurate. microsoft recognizes openai losses on their income statement, proportionate to their ownership stake. this has created a huge drag on eps, along with a lot more eps volatility than in the past. it's gotten so bad that microsoft now points people to adjusted net income, which is notable as they had always avoided those games. none of this has been welcomed
rrrrrrrrrrrryan 9mo ago
> Something nobody's talking about Nobody is talking about this because it's not a thing. People here will shit on LLMs all day for being confidently incorrect, then upvote aggressively financially illiterate comments like this.
gamblor956 9mo ago
OpenAI is a corporation, so their losses do not flow up to their owners. Their investors, if publicly traded like Microsoft do have to take write-downs on their financial statements but those aren't realized losses for tax purposes. The only tax "benefit" Microsoft might get from the OpenAI investment is writing off the amount it invested if/when OpenAI goes bankrupt.

by jotras 9mo ago

rebuilder 9mo ago

It’s hardly a free option, by your numbers it’d be a 20-30% discount.

thrwaway55 9mo ago
Sure but if there's no moat would you rather pay 100% or 80% until the credits run out? You reap the 100% spend in the meantime. Not everyone even has the no moat discount.

ludicrousdispla 9mo ago

>> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields So just a loss for governments, or in other words, socializing the losses.

booi 9mo ago
Hi, I'm here to hold the bag?
- chinathrow 9mo ago
  Your pension fund, yes.
  - lotsofpulp 9mo ago
    This comment makes even less sense than jotras’ comment. Pension funds buy shares in businesses such as Microsoft. The money going into the pension fund is not typically a function of the tax paid by companies such as Microsoft, but rather from a combination of actuaries’ recommendations, payroll tax receipts, and politicians’ priorities. Therefore a pension funds’ equity holdings, such as Microsoft, doing well means taxes can be lower.
    - jdiez17 9mo ago
      If only my country (Germany)’s pension fund was capital/stock based.
      - lotsofpulp 9mo ago
        Most countries' broadest defined benefit pensions are just simple wealth redistribution schemes from workers to non workers as opposed to being paid from funds that were previously invested. In the USA, Social Security defined benefit pensions are cash from workers today going to non workers today, same as Germany's national scheme (gesetzliche Rentenversicherung?). The other defined benefit benefit pension schemes are what are usually invested in equities, and the investment restrictions section in this document indicate Germany's "occupational pensions" can also invest in equities. (page 12) https://www.aba-online.de/application/files/2816/2945/5946/20210819_Occupational_Pensions_Landscape_in_Germany.pdf https://www.aba-online.de/application/files/2816/2945/5946/2...
- Groxx 9mo ago

Jare 9mo ago

> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields (depending on their bracket and how the structure works). That completely changes the return calculation I know nothing about finances at this level, so asking like a complete newbie: doesn't that just mean that instead of risking $10B they're risking $7-8B? It is a cheaper bet for sure, but doesn't look to me like a game changer when the range of the bet's outcome goes from 0 to 1000% or more.

sigmoid10 9mo ago
It all depends on the actual numbers. Consider this simplified example: If you are offered a deal that requires you to lay down 10 billion today and it has a 5% chance to pay out 150 billion tomorrow, your accountants will tell you not to take this deal because your expected return is -2.5 billion. But if you can offset 3 billion in cost to the tax payer, your expected return suddenly becomes $500 million, making it a good deal that you should take every time.
- lotsofpulp 9mo ago
  This applies to any spending Microsoft does. What does it have to do with OpenAI? Also, classifying business expenses as "cost to the tax payer" seems less than useful, unless you are a proponent of simply taxing gross receipts. Which has its merits, but then the discussion is about taxing gross receipts versus income with at least some deductible expenses, not anything to do with OpenAI.
- Fraterkes 9mo ago
  I get that this example is simplified, but doesn’t the maths here change drastically when the 5% changes by even a few percentage points? The error bars on Openais chance of succes are obviously huge, so why would this be attractive to accountants?
  - sigmoid10 9mo ago
    That's why you have armies of accountants rating stuff like this all day long. I'm sure they could show you a highly detailed risk analysis. You also don't count on any specific deal working, you count on the overall statistics being in your favour. That's literally how venture capital works.

danielscrubs 9mo ago

Can you explain it in another way? What you are saying is that instead of loosing 100% they loose 70% and loosing 70% is somehow good? Or are you saying the risk adjusted returns are then 30% better on the downside than previously thought? Because if you are, I think people here are saying the risk is so high that it is a given they will fail.

gosub100 9mo ago
Let's say they are paying for "research". The research is very expensive and has a high likelihood of being worthless, but a small likelihood of having value later. So by claiming the financial loss, they can offset the cost of the expensive research by 30%, making it an even more attractive gamble.

pvtmert 9mo ago

Amazon already has not been paying any sort of income tax to the EU. There was a lawsuit in Belgium but Amazon has won that in late-2024 since they had a separate agreement in/with Luxembourg. Speaking for EU, all big tech already not paying taxes one way or another, either using Dublin/Ireland (Google, Amazon, Microsoft, Meta, ...) and Luxembourg (Amazon & Microsoft as far as I can tell) to avoid such corporate/income taxes. Simply possible because all the earnings go back to the U.S. entity in terms of "IP rights".

lotsofpulp 9mo ago
> Amazon already has not been paying any sort of income tax to the EU. That should be expected, because https://european-union.europa.eu/priorities-and-actions/actions-topic/taxation_en https://european-union.europa.eu/priorities-and-actions/acti... > The EU does not have a direct role in collecting taxes or setting tax rates. > There was a lawsuit in Belgium but Amazon has won that in late-2024 since they had a separate agreement in/with Luxembourg. Dec 2023. > Speaking for EU, all big tech already not paying taxes one way or another, either using Dublin/Ireland (Google, Amazon, Microsoft, Meta, ...) and Luxembourg (Amazon & Microsoft as far as I can tell) to avoid such corporate/income taxes. Simply possible because all the earnings go back to the U.S. entity in terms of "IP rights". Ireland (due to pressure from EU) closed this in 2020. The amount of tax collected by Ireland quadrupled. See Figure 5 and 6 in link below. https://budgetmodel.wharton.upenn.edu/issues/2024/10/14/the-end-of-the-double-irish https://budgetmodel.wharton.upenn.edu/issues/2024/10/14/the-...
- benjiro 9mo ago
  > any sort of income tax to the EU. Its clear that OP means "in the EU". > Ireland (due to pressure from EU) closed this in 2020. The amount of tax collected by Ireland quadrupled. See Figure 5 and 6 in link below. And Ireland fought against this tooth and nail. Yes, a country was fighting to have less income. All out of fear that the companies will leave the little tax heaven. Did they leave? No ... > See Figure 5 and 6 in link below. Figure 7 is also interesting if we look at the tax income increase and the outbound.
- 9mo ago

lenkite 9mo ago

> OpenAI's losses might actually be attractive to certain investors from a tax perspective. OpenAI is anyways seeking Govt Bailout for "National Security" reasons. Wow, I earlier scoffed at "Privatize Profits, Socialize Losses", but this appears to now be Standard Operating Procedure in the U.S. https://www.citizen.org/news/openais-request-for-massive-government-bailout-package-is-pure-corporate-entitlement/ https://www.citizen.org/news/openais-request-for-massive-gov... So the U.S. Taxpayer will effectively pay for it. And not just the U.S. Taxpayer - due to USD reserve currency status, increasing U.S. debt is effectively shared by the world. Make billionaires richer, make the middle class poor. Make the poor destitute. Make the destitute dead. (All USAID cuts)

alex43578 9mo ago
There's already a lot that the US taxpayer is on the hook for that's a lot less valuable than a best on the next big thing in software, productivity, and warfare. It shouldn't be the job of the US taxpayer to feed someone that doesn't want to work, study, or pass a drug test, and it absolutely shouldn't be the job of the US taxpayer to feed another country's citizens half a world away.
- Ar-Curunir 9mo ago
  The modern welfare state is the compromise reached by capitalist democracies to stave off communist revolutions. If you’re going to kill of the welfare part, be ready for the uprising part.
  - nosianu 9mo ago
    That's where the surveillance and the militarized police force(s) come in. Especially the former now has reached extraordinary levels, given that almost all communication now is easily trackable. Compare that to when we still had revolutions, where it was very hard for government to know what is going on, and to find individuals without a huge effort. I think revolutions have become next to impossible, unless it is lead by significant parts of the elite that controls at least part of the apparatus. That's not even counting the far more sophisticated propaganda methods, so that many of the affected people won't even begin to target the actual culprits but are lead to chase shadows, or one another.

Zenst 9mo ago

Whilst that is an option, it wont cover the share price hit from the fallout, which would wipe out more than the debt as when the big domino falls, others will follow as the market panic shifts. So kinda looking at a bank level run on tech companies if they go broke.

sod22 9mo ago

Lmao this is ridiculous. If MSFT really wanted the tax benefits they should’ve just wholly acquired OAI long ago to acquire the financial synergy you speak of.

visarga 9mo ago

> The real question isn't "can OpenAI justify its valuation" but rather "what's the blended tax rate of its investor base?" Was that an organic "it's not A, it's B" or synthetic?

mbesto 9mo ago

None of this is how taxes work.

gamblor956 9mo ago
Correct, for tax purposes corporate losses remain with the corporation. Microsoft and the other owners don't get the benefit of OpenAI's losses. At best, they get to write off their investment in OpenAI if the company dissolves, at which point their maximum tax write-off is their capital investment. Note: other people seem to be confused because companies can write off investments in corporate subsidiaries before the subsidiary is dissolved or sold...for book purposes. This creates what is known in the accounting world as a book-tax difference. If you have a few weeks to spare, look up tax provisions...

louiereederson 9mo ago

this is not accurate. microsoft recognizes openai losses on their income statement, proportionate to their ownership stake. this has created a huge drag on eps, along with a lot more eps volatility than in the past. it's gotten so bad that microsoft now points people to adjusted net income, which is notable as they had always avoided those games. none of this has been welcomed

rrrrrrrrrrrryan 9mo ago

> Something nobody's talking about Nobody is talking about this because it's not a thing. People here will shit on LLMs all day for being confidently incorrect, then upvote aggressively financially illiterate comments like this.

gamblor956 9mo ago

OpenAI is a corporation, so their losses do not flow up to their owners. Their investors, if publicly traded like Microsoft do have to take write-downs on their financial statements but those aren't realized losses for tax purposes. The only tax "benefit" Microsoft might get from the OpenAI investment is writing off the amount it invested if/when OpenAI goes bankrupt.