Meta counted Mark Zuckerberg’s $4.1B stock payout as research pay to claim a $355M tax break — and the IRS wants it back

Rudro ChakrabartiThu, October 1, 2026 at 4:05 AM UTC

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When Mark Zuckerberg exercised a huge batch of Facebook stock options in 2012 and 2013, the company counted billions of dollars of that payout as wages for research.

That helped Facebook, now Meta (NASDAQ:META), claim about $355 million in federal tax credits, according to U.S. Tax Court filings. The IRS disallowed those credits — and more than a decade later, the fight still isn't settled.

The case is back in the spotlight after a New York Times investigation published Sept. 30 reported that Meta now applies the same tax break to its AI data centers, which it classifies as experimental "pilot models" for tax purposes. Meta's securities filings show the research credit cut its taxes by $3.9 billion in 2025, up from $2 billion in 2024 and $700 million in 2023.

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So how does a CEO's payday end up on a research tax form? Here's a closer look at the fight — and what it means if you get paid in stock options.

How Zuckerberg's stock options became a research tax credit

Congress created the research and experimentation credit in 1981 to encourage companies to spend more on research. The basic credit is worth 20% of a company's qualified research spending above a base amount, and it comes straight off the tax bill. Pay for employees who do the research, or directly supervise or support it, counts.

Facebook claimed more than $618 million in research credits for 2012 and 2013, according to the IRS's filing. About $355 million of that came from Zuckerberg's options, granted in November 2005 and stretched to 120 million shares by later stock splits. Meta argues roughly $4.1 billion of his payout counts as wages for research he performed.

So does Meta have a case?

In a 1995 case involving Sun Microsystems, the Tax Court ruled that employee stock option income can count as wages for the research credit. It relied on a 1992 ruling involving Apple.

The IRS's audit guide for the credit also counts option income as research wages in the year it's exercised, as long as the employee's work qualifies.

Why the timing of Zuckerberg's options matters

Meta's case hinges on timing. The company told the court the year that matters is 2005, when the options were granted and when, according to Meta's filing, Zuckerberg "personally wrote software code" and oversaw Facebook's technology. Meta also argues the IRS has looked to the grant date of stock options for 20 years, including in its own cost-sharing rules.

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The IRS sees it differently. The agency says what matters is the vesting period, from Jan. 1, 2008, through Nov. 1, 2010, and that only Zuckerberg's work during that span counts. It also points to the option contract itself, which says the options weren't granted as payment for work done before vesting began.

Both sides asked the court to settle the timing question in May 2025, and it has yet to rule.

Meta did not immediately respond to Moneywise's request for comment.

How stock options are taxed when you exercise them

When you exercise nonqualified stock options, the gap between what you pay and the stock's market value is generally taxed as ordinary income, just like your salary. That can push you into a higher tax bracket in the year you exercise.

Zuckerberg sold 30.2 million shares at the $38 IPO price — roughly $1.15 billion — to cover the taxes on his first round of exercised options, according to Facebook's IPO prospectus. In December 2013, he sold another 41.35 million shares at $55.05 apiece in a follow-on offering, or about $2.3 billion, to cover the taxes on the rest.

Elon Musk posted on X in May that exercising and selling stock options comes with a combined federal and state income tax rate of about 45%. He said he'll probably end up paying "trillions in taxes," up from the more than $500 billion he predicted in February.

You generally don't owe regular income tax when you exercise incentive stock options, but the exercise can trigger the alternative minimum tax. A tax advisor can help you time an exercise across tax years so the whole gain doesn't land on top of your salary at once.

Eligible small businesses can claim the research credit on Form 6765, and qualified startups — generally those with less than $5 million in gross receipts and no more than five years of revenue — can apply up to $500,000 a year against their payroll taxes.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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Source: “AOL Money”