Hyunjoo Jin, David Lawder, and Jessica DiNapoli

(Reuters) – Elon Musk, a Twitter user (NYSE:) asked his followers last week if he wanted to sell 10% of Tesla Inc’s stock. He said he did so because “much lately is made of unrealized gains as a way of tax avoidance.”

However, the timing of the upcoming stock sale may solve his tax problem and spare Tesla billions from its tax bill. This is before Congress Democrats tighten on tax breaks like these and attempt to raise taxes for super-wealthy people. Tax and corporate compensation specialists agreed.

Musk may time his proposed sale so that it coincides with an estimated federal tax bill worth nearly $11billion. This would come about by Musk exercising some of his Tesla stock options valued at $26.6billion as of Monday’s closing.

Musk stated previously that he doesn’t keep too much cash because of his 17% Tesla stake. The options will expire August 2022. To pay taxes, he could borrow against Tesla shares.

Musk was granted the options in 2012. This year, Tesla’s Model S first came out and only 3,100 vehicles were built.

Tesla, now worth over $1 million per year, is the world’s top-selling car company, almost a decade after its founding. There are also factories in construction around the globe.

Musk would be subject to full income taxes on the enormous gain in share value. However, Musk could also sell shares without any capital gains tax.

Tesla may also be able to use this move to claim a greater than $5 billion income tax deduction to fund the transfer of Musk shares, according to Steve Rosenthal, senior associate at the Urban-Brookings Tax Policy Center.

Tesla may lose this advantage if he waits too long. Democratic legislators propose a 15% alternative corporate minimum tax to eliminate these deductions. This would be part of President Joe Biden’s broad social and climate spending plans.

Steve Rosenthal is a senior fellow at Urban-Brookings Tax Policy Center in Washington. He said that Musk gets the last laugh every time Tesla makes a significant deduction.

Musk and Tesla have not yet responded to inquiries for comment.

SELLING IS VERSUS BOROROWING

Musk was required to meet certain performance targets in order to be eligible for the stock options. These included a $4 billion increase Tesla’s market capitalization as well as operational goals related car development.

Tax experts stated that any gain from the exercise of the options will be taxed at 37%, plus an additional 3.8% Medicare surcharge. California and Texas would both collect extra taxes.

Brian Foley is an independent compensation expert who said Musk could choose to sell stocks or take out a loan against the tax bill. If Tesla shares were to fall in value, Musk may find himself in serious financial trouble.

Foley explained that selling shares makes good sense if the stock has appreciated in value as high as Foley’s stock.

Musk didn’t make it clear in his proposal as to why 10% of his shares would be sold.

Musk mentioned his tax liability in a tweet last weekend but did not specifically mention the exercise of options.

Note that I never take cash bonuses or salary. Musk explained that stock is all I have and the only way to pay taxes for myself personally is to buy stock.

MINIMUM TX PUSH

Tesla’s tax advantage of exercising options has been an established feature in U.S. corporate tax laws. It allows many large corporations to minimize their tax liabilities while remuneration executives with stock is high.

Biden has lamented that big companies pay very little in taxes, and he has backed Democrats’ proposal for a 15% corporate minimum tax. It excludes stock-related deductions. Companies would be unable to cut their tax bills.

Biden’s bill “Build Back better” includes a major revenue-creating measure: the minimum tax. This would pay for universal preschool, an increased child tax credit, and other tax incentives in green energy and electric vehicles.

Over a period of 10 years, the provision is expected to generate new revenues in excess of $319 million.

Although the Draft Build Back Better legislation depicts the Corporate Minimum Tax starting in the 2023 year of tax, some elements of the package were modified quickly in order to comply with lawmakers’ requirements.

The latest bill version by Democrats does not include a tax proposal on unrealized investments gains of billionaires, as Musk mentioned in his tweet.

This was dropped in favour of an income tax surcharge of 5% on earnings exceeding $10 million and an additional 8% surcharge on earnings greater than $25 million. Musk could be caught if this provision is passed before stock option gains can be taxed at the regular income tax rates.