Wealth

Reid Hoffman to face massive tax bill following LinkedIn sale

Reid Hoffman faces big taxes from LinkedIn sale
VIDEO0:4600:46
Reid Hoffman faces big taxes from LinkedIn sale

Microsoft's $26.2 billion purchase of LinkedIn has created a multibillion-dollar payday for co-founder and chairman Reid Hoffman. But along with the windfall will come a massive tax bill that could top $300 million for the state of California alone.

As of February, when the firm filed its annual 10-K with the Securities and Exchange Commission, Hoffman owned roughly 11 percent of LinkedIn's shares. Given that ownership and a purchase price of $196 a share, his take from the all-cash deal could be more than $2.8 billion.

Hoffman didn't respond to CNBC's requests for comment. Yet because he lives in Palo Alto, Calif., his shares would presumably be subject to California state and federal taxes.

The Golden State taxes capital gains, such as the sale of stock, at a top rate of 13.3 percent. So its take from Hoffman's windfall could top $370 million, if he used no special tax strategies. When combined with a federal capital gains tax of 23.8 percent for the highest earners, his total tax bill could be more than $1 billion.

"For Reid Hoffman, the good news is that he's just made a boatload of money," said Daniel Morris, partner with Morris+ D'Angelo, an accounting firm in San Jose, Calif., that advises many tech founders. "On the other hand, it's also really great for the state of California because of the taxes."

Microsoft & LinkedIn CEOs on their $26.2B deal
VIDEO4:2004:20
Microsoft & LinkedIn CEOs on their $26.2B deal

It's unclear which, if any, measures Hoffman took to reduce his tax bill. But Morris said there are several moves that Hoffman could use. For starters, he could donate a billion or more to charity. He and his wife, Michelle Yee, are already high-profile philanthropists, having donated millions of shares of Zynga to a donor-advised fund.

Morris said Hoffman could donate some of his cash windfall to a foundation and deduct a portion of that amount from his income.

"If he gives $1 billion to his foundation, he can deduct from his income and of course, help others in the process," Morris said.

Another strategy Hoffman could use to limit his tax bill is qualifying investments. Through this tactic, tech founders such as Hoffman — who do a lot of angel investing and start-up funding — can roll their windfalls into new start-ups and defer the taxes.

There are loads of qualifications and caveats, and the tax is only deferred not eliminated. But "for people with the right kind of shares and start-ups, it's a smart strategy," Miller said.

For the state of California, the Hoffman windfall (whatever its size) and payments from other LinkedIn shareholders come at a welcome time. The state's tax revenues are falling, in part because of the dearth in tech IPOs, stock sales and acquisitions, which created massive income-tax payments in the past.

Last month, the state cut its revenue forecast for the fiscal year by $1.9 billion, due in part to a decline in personal income taxes.