11 big profitable companies pay no tax

You’re probably figuring out how much you owe the tax man for 2014 about now. The answer for a handful of big profitable companies is zilch.

There are 11 companies in the Standard & Poor’s 500, including tire maker Goodyear Tire & Rubber (GT), electronic component maker Eaton (ETN) and restaurant chain operator Darden Restaurants (DRI) that paid no income tax in calendar 2014 despite reporting a profit during the year, according to a USA TODAY review of data from S&P Capital IQ.

Only companies that were profitable in 2014 were included, since companies that lose money understandably don’t have income to report. Also excluded were real-estate investment trusts (REITs) due to their unique “pass-through” accounting, which shifts the tax burden to shareholders rather than the company itself.

Seeing these money-making companies pay no income tax makes only stokes the raging debate over corporate taxation. A number of giant companies continue to keep cash parked overseas to avoid triggering a potential tax hit. And there’s the perennial debate – usually this time of year – about whether U.S. corporate tax rates are too high, or too low.

Paying $0 tax is certainly unusual. Nearly all the companies in the S&P 500, 468, have reported their 2014 profit and income tax expenses. The companies, again excluding REITs and money-losing companies, reported an average effective tax rate of 36.6% for calendar 2014, says S&P Capital IQ. S&P Capital IQ calculates the effective tax rate by dividing companies’ income tax expense by its earnings before taxes including unusual items. The federal corporate tax rate is currently 35%.

Interestingly, keeping taxes low hasn’t translated into victory for investors. The 11 stocks, on average, are up 11.9% over the past year, trailing the 14.2% increase by the Standard & Poor’s 500 during the same period. That might be explained by the very unique situations that resulted in some of these companies’ extraordinarily low effective tax rates. These stocks also lagged in early and mid-2014 when the tax issue was on the front burner. The chart below shows an equal weighted index of the stocks, plotted against the S&P 500, highlighting how the companies paying no taxes haven’t exactly lit up the stock market.

Take the example of Goodyear Tire. The company received a massive tax credit of $1.8 billion during 2014, despite reporting earnings before taxes of $687 million. That credit was a big reason why the company reported net income of $2.5 billion during the year. Why did the company show a tax credit despite being profitable? It has to do with accounting rules. Goodyear held money aside for taxes, which is was able to release in 2014. This move was taken after the company was sure the reserve was bigger than needed due to recent results. The company posted its third year of profitability and completed successful negotiations with the United Steelworkers in 2013. The pension also reached “full funding” and the company is projecting a profit in 2015, according to Goodyear’s filing. Investors can enjoy tax benefits for years, Goodyear says. The company says it has enough tax credits that it estimates “paying no significant federal income tax” over the next five years. But the company itself says, in its filing, that its effective tax rate will likely rise – eventually.

Tax inversions were a big deal in 2014. That’s a corporate move where a headquarters is moved to a country – outside the U.S. – with more favorable tax rules. Eaton remains a poster child for a big company that finds way to keep its tax rates low – largely by placing its official headquarters outside the U.S. The company, which moved its head office to the tax haven of Ireland several years ago, is showing the benefits at tax time. The company reported an income tax benefit of $42 million during the year. Most of the tax benefit was due to tax benefits from litigation settlements. But Eaton’s structure has allowed it to keep taxes super low for years. The company’s effective tax rate was 0.6% in 2013 and 2.5%. in 2012.

This analysis is based on calendar years – so the comparison is the same for all companies. Darden’s fiscal year ends in May. Yet, following official accounting rules, the company didn’t pay taxes on a corporate level during its fiscal 2014 year, either, instead taking a tax benefit of $8.6 million during the fiscal year, according to regulatory filings.

Darden says the tax numbers following Generally Accepted Accounting Principles are distorted due to changes in the business during the year and due to timing. “Darden pays its income taxes based on its fiscal year business results. The Company’s fiscal year runs from June-May. As disclosed in our 10K filed with the SEC, for the last three fiscal years ended May 2014, 2013 and 2012, the consolidated Company paid $90 million, $98.5 million and $123.5 million in income taxes,” according to an e-mailed response from a company spokesman, Rich Jeffers.

Maybe you’ll keep these companies in mind when you write your check to the Internal Revenue Service this April.