Adam N. Michel
The Institute on Taxation and Economic Policy (ITEP) has released a report claiming that 88 large corporations paid zero federal income tax on $105 billion of profits in 2025. The report is intended to grab headlines and feed into the pervasive misunderstanding that big corporations skip out on their tax bills.
But the report’s headline claim is simply wrong. The profits and taxes in ITEP’s headline come from two different accounting systems, built for different purposes, reporting to different audiences, using different rules.
You Can’t Compare Accounting Profits to Taxes
ITEP’s method compares two numbers that are calculated under different rules for different purposes.
The $105 billion in US income reported is financial accounting profits that companies report to investors under Securities and Exchange Commission (SEC) rules, in accordance with Generally Accepted Accounting Principles (GAAP). The reported taxes (or lack thereof) are current federal income tax expenses that reflect an estimate of tax payments owed to the IRS in that company’s 2025 fiscal year. These estimates follow tax rules set out in the Internal Revenue Code but can still differ substantially from what’s actually reported on a company’s Form 1120. The two systems—GAAP and the tax code—define income, deductions, and timing differently. Using one system in the numerator to the other in the denominator tells us nothing meaningful about profits or taxes. It instead serves to intentionally confuse.
A simple example shows why. Imagine a company earns $10 million and spends all of it on a new piece of manufacturing equipment in 2025. Under financial accounting rules, the firm spreads out the cost of that purchase over 10 years, deducting $1 million per year. So in 2025, the firm’s accounting books show $9 million of profit on $10 million of pre-investment earnings.
Under current tax law, the firm can deduct the full $10 million in the year the investment is made. The firm’s taxable income in 2025 is zero, but it will have no additional deductions left over in future years.
ITEP’s method would report that this hypothetical firm earned $9 million in profit and paid zero federal income tax. In reality, it spent every dollar it earned investing in new manufacturing capacity. Its economic profits and taxable income match; they are both zero.
This isn’t tax avoidance; the tax code and accounting rules simply recognize costs at different times. Comparing the two misunderstands the lumpiness of business income, and this misunderstanding is at the heart of nearly every company on ITEP’s list.
The Tax Breaks Are the Point
ITEP helpfully catalogs the tax provisions that reduced these companies’ tax and taxable income to zero. They don’t reveal a scandal; they are a list of popular, bipartisan policies. Companies using them are doing what the law intends, often for good reason.
Accelerated depreciation and expensing. The most common tax break is accelerated cost recovery. The purest form of this policy is expensing, which allows businesses to deduct the cost of an investment when they actually spend the money, rather than requiring the cost to be spread out over the asset’s useful life as GAAP requires. The accounting treatment makes sense for reporting to investors who want to understand the firm’s long-run financial position by smoothing over lumpy capital expenditures. But immediate expensing is the economically correct treatment of business costs and has been supported by economists across the political spectrum for decades. Some version of accelerated depreciation has been in every major tax bill since the early 2000s, signed by presidents of both parties, including the Democrats’ Inflation Reduction Act.
Expensing does not change the nominal amount of tax payments; it changes only the timing, shifting taxes paid into the future when the firm is economically profitable and moving deductions forward in time. The bipartisan appeal is that this keeps taxes low on businesses that are continually reinvesting their profits into new productive capacity.
Research and development credit. Bipartisan majorities have supported the R&D tax credit since its introduction in 1981. It is not particularly well designed, but it nonetheless retains widespread support.
Foreign-derived intangible income deduction (FDII). This provision lowers the effective tax rate on income from US exports. The 2025 tax bill reformed and expanded it into a broader export incentive now called foreign-derived deduction-eligible income (FDDEI), effective for tax years beginning in 2026. The original FDII deduction is widely credited with encouraging major US firms, such as Google, to repatriate hundreds of billions of dollars in intellectual property, shifting taxable income back to the US that would have otherwise been reported and taxed abroad. The Biden administration included its own domestic intellectual property incentives in its annual budget proposals.
Stock option deductions. When a company grants an employee stock options, there is no tax event until the employee exercises them. At exercise, the employee reports the difference between the purchase price and the market price as ordinary taxable income. The tax code allows the company to deduct the same amount the employee reports as income, just like wages. The tax break ITEP identifies arises because GAAP requires companies to estimate and report the cost of stock options when they are granted, instead of what employees ultimately realize at exercise. This is not a tax problem; it is simply a function of two systems measuring different things for different purposes.
The Right Corporate Tax Rate Is Zero
The corporate income tax should be eliminated entirely. The corporate tax is the most economically costly major source of revenue, and it comes with high compliance costs. The economic cost of the tax is borne mostly by workers in the form of lower wages, but shareholders and consumers also pay a hidden price. Other taxes on individual income, consumption, or land raise more revenue, at lower rates and with less economic damage.
The goal should be for all companies (not just 88) to pay zero federal income tax. But ITEP’s list doesn’t show that we’ve moved closer to the zero tax ideal. Many of these companies have paid substantial taxes in the past and will pay even more in future years. The ITEP report takes a snapshot in time and claims that timing differences reveal something meaningful about the tax code. They don’t.
