With Bigger Bonuses, Another Upside for Banks
Along with Wall Street’s resurgent bonuses will come a jump in an ancillary benefit: tax breaks.
For all banks and Wall Street firms, “I’m sure we’re talking $200 billion total compensation, which would create a tax savings for the firms of $80 billion,” said Robert Willens, an accounting and tax analyst in New York who runs a consulting firm, Robert Willens LLC. The figure does not include bonus plans by hedge funds, which are likely to reduce their payouts after a down year.
The tax deductions, which will increase the bottom line of the banks, are perfectly legal and not new. They come as compensation for 2009 has roared back after the largest banks paid back billions of dollars in federal aid, an outlay still fresh in the minds of taxpayers. As pay goes up, so do the deductions.
Many American banks already pay minuscule federal income taxes, because of various deductions and clever tax planning; the payout-related breaks will reduce their tax bills further in coming years.
The biggest tax break will go to Goldman Sachs. It expects to award its employees $23 billion in bonuses — the most in its history — after having paid back $10 billion. Because most employee compensation is a deductible expense under tax laws, Goldman Sachs, which is technically taxed at a top corporate rate of 39 percent, will save about $9 billion in federal income taxes on the bonuses it pays out for 2009, Mr. Willens said.
The tax breaks cover both cash awards and stock options. Banks can generally carry back losses related to compensation two to five years or forward 20 years, depending on when the payouts are made in a given tax year.
Employees who receive bonuses pay taxes on them, often at the top personal rate of 40 percent, so that money flows back into federal coffers. But because the banks get the expense-related deductions, the actual cost to the banks of paying $200 billion in bonuses is only $120 billion, Mr. Willens said.
Altogether, the top three Wall Street banks — Goldman Sachs, JPMorgan Chase and Morgan Stanley — will gain nearly $20 billion in tax breaks based on their employee compensation this year. Mr. Willens calculated the tax savings based on the nearly $49.5 billion in cash bonuses and stock awards that David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, a brokerage firm in New York, has said the three are expected to pay this year.
Wall Street banks typically set aside half their annual revenue for employee compensation.
Only firms that have repaid their federal bailout money are allowed to award unlimited bonuses. Some firms, including Goldman Sachs, have tried to quell the uproar over bonuses by saying they will skip cash awards for their top workers in favor of stock compensation, which will still give the firm a tax deduction. Others have said that their top executives — Morgan Stanley’s chief executive, John J. Mack, is a notable example — will receive no bonus at all.
But after the federal government spent $787 billion in taxpayer money in part to prop up the very Wall Street firms that many critics point to as a cause of the financial crisis, the deductibility of the paydays is likely to stoke official and populist criticism of Wall Street’s pay practices, Mr. Willens said.
“People are going to be unhappy,” he said.