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Millions in profits and a tax bill ($0) to envy

Generous breaks a significant plus for 30 public companies in the state

By Beth Healy
Globe Staff / May 1, 2011

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They are high-tech companies, financial players, and manufacturers. What they all have in common: They paid no federal income taxes last year, despite making millions of dollars in profits.

Software company Novell Inc. and cellphone tower giant American Tower Corp. are just two of 30 public companies in Massachusetts that owed no federal income tax in 2010, generally because they lost money in prior years and were able to carry forward those losses to offset tax liabilities. In some cases, companies received refunds worth millions of dollars.

They are beneficiaries of longtime tax breaks for corporations, tax specialists say, coupled in some cases with shorter-term tax benefits that lawmakers introduced in the past three years to help companies during the recession. Indeed, more than one-quarter of 112 profitable, publicly traded companies in the Commonwealth did not write checks to Uncle Sam for the 2010 tax year, according to a Globe review of tax data filed with regulators and compiled by Standard & Poor’s Capital IQ.

That’s not necessarily what Congress had in mind, US Representative Barney Frank said in an interview. Lawmakers “have considered each individual tax credit on its merits with out understanding that people who were clever could accumulate a bunch of them and end up paying nothing,’’ the Newton Democrat said, referring to corporate tax lawyers. “We have to look at the cumulative effect of them.’’

While the US corporate tax rate is 35 percent, that’s hardly the typical rate companies pay. For example, Novell last year had an effective tax rate of less than zero, according to its annual report filed with the Securities and Exchange Commission. The result: the Waltham company made a $378 million profit for the year and received a $9.1 million federal income tax refund, mainly thanks to tax losses carried forward on companies it had acquired.

No Massachusetts company had a larger federal tax benefit last year than State Street Corp. The Boston financial services giant received an $885 million refund, after taking significant losses on its investment portfolio. State Street received a $2 billion taxpayer-funded bailout in 2008, which it has since repaid, and last year reported a $1.6 billion profit.

The company drew fire last month from labor groups, which decried its refund given its large profits and taxpayer bailout. State Street recently cut its head count by 5 percent, laying off 400 workers in the Boston area, and 1,000 more in other locations. State Street spokeswoman Arlene Roberts said the company “follows all applicable tax rules.’’

Jeff Crosby, president of the IUE-CWA Local 201, whose members make jet engines in Lynn for General Electric Co., said tax cuts to major companies often don’t create jobs or benefit workers. GE, the largest US company, has sparked national attention to corporate taxes because it paid no federal tax bill last year, even though it turned a $14.2 billion profit.

“That’s billions we’re spending subsidizing rich companies,’’ Crosby said. “If tax cuts created jobs, we’d have full employment.’’

State Street and many other Bay State companies are simply taking advantage of longstanding, legal tax deductions. But Congress and the Obama administration have extended about $48 billion more in short-term tax breaks to large corporations since 2009, according to the US Treasury Department, aimed at fueling growth and protecting jobs.

One deduction allowed companies to apply their losses toward five years of past profits, instead of two. Another, which was meant to encourage spending on machinery and equipment, allowed companies to speed up how quickly they could deduct those investments. A number of these deductions expire within a year or two.

Douglas Stransky, a tax partner at the Boston law firm Sullivan & Worcester, said, “The government specifically made the use of losses a more favorable opportunity’’ because so many companies were struggling in the bad economy. “Theoretically, a company could offset 100 percent of its taxable income with losses from prior years and therefore owe no taxes.’’

American Tower is a prime example of how this works. The company earned $373 million last year but paid zero federal taxes. That’s because it’s rolling over large past losses, $1.2 billion worth. In fact, the sum is so large, American Tower said in its securities filing that it may not be able to use all the losses within the allowed 20 years. It’s considering changing its status to a real estate investment trust, a more advantageous tax status.

A large slice of American Tower’s losses comes from $300 million in expenses for employee stock options, another longtime deduction. Companies get to deduct stock options as a form of compensation, and in an ironic twist, the more the stock price goes up, the more they get to write off. For example, if an employee exercises stock options valued initially at $10 a share, and if the stock rises to $20, the company writes off the $10 difference as a “loss.’’ If the stock surges to $50, the company gets to write off $40.

Corporate tax lawyers say the system is fair; it lets companies take credit for stock compensation in the same way that they would otherwise deduct employee salaries. But it’s also another way in which taxpayers are subsidizing companies, said Robert McIntyre of Citizens for Tax Justice, a Washington group that advocates for American workers on taxes.

“Our swashbuckling capitalists couldn’t live without the government subsidizing them,’’ McIntyre said.

Genzyme Corp., a Cambridge biotechnology company, uses many strategies to lower its tax bill, from manufacturing credits to deductions for research and development and the cost of executive stock compensation. The company posted a net profit of $422 million in 2010, and reported that the federal government owed it $24.4 million on its continuing operations.

Company executives explained that Genzyme actually paid about $150 million in federal taxes, including the results of a money-losing genetics unit it sold last year. John Lacey, a spokesman for Genzyme, said that after paying about a half-billion dollars in federal income taxes in 2008 and 2009 combined, the company’s latest tax bill was lower because of performance — namely losses related to a virus at its Allston plant.

To be sure, many Bay State companies did pay taxes last year. Computer storage giant EMC Corp. earned $1.9 billion and paid $518 million in federal income taxes, more than any other public company in the state, according to Capital IQ.

The second biggest federal income taxpayer on the list was retailer TJX Cos., which paid $510 million and had $1.3 billion in profits.

Some Massachusetts companies pay little or nothing in federal taxes because they are doing most of their business overseas. Take Cabot Corp., an industrial manufacturer with 600 workers spread across its Boston headquarters, engineering center in Billerica, and a Haverhill plant. The company paid $53 million in foreign taxes, while the US government owed it $8 million, partly because some tax audits resolved in Cabot’s favor. Eighty percent of Cabot’s sales were reaped outside the United States, in Asia and Europe.

Teradyne Inc., a North Reading company that makes testing equipment for the semiconductor industry, earns only 15 percent of its revenues in the United States. It got back nearly $2 million in federal taxes after posting a $380 million profit in 2010. Not only did the company take advantage of carrying forward losses from several years over the past decade, but it also benefited from tax breaks related to research and development credits.

Andy Blanchard, a spokesman for Teradyne, said: “We, like a lot of the tech companies, had a tough decade. In 2010 things started improving.’’

Beth Healy can be reached at bhealy@globe.com.

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No taxes owed

No taxes owed

These 30 Massachusetts companies did not owe any federal income tax in 2010.