How Meta Uses AI Data Centers to Avoid Billions in Federal Taxes

(Times Exclusive)Mark Zuckerberg says Meta's artificial intelligence push is a tremendous success. "Our investments in AI are accelerating every major part of our core business," he has told investors. "Every sign that we're seeing in our own work and across the industry gives us confidence in this investment."But when Meta files its taxes, it tells the IRS a different story. It claims that its AI data centers are a giant experiment that could fail, according to four people with knowledge of the company's operations.It does this so it can tap into a tax credit intended for research and experimentation. It's an aggressive interpretation of the tax break, which Meta embraced to claim billions of dollars in tax credits for data center expansion.Characterizing its AI data centers as experimental is "kind of wild and out there," said Andre Shevchuck, a partner at advisory firm BPM who specializes in the research and experimentation tax credit.Indeed, Meta's own accountants recognize that the strategy is on shaky legal ground. In disclosures buried in securities filings, the tech giant warns that billions in tax savings are vulnerable to being overturned by the IRS, in large part because of "uncertainties with our research tax credits."Here's what Meta is doing: For tax purposes, the company classifies its enormous, multibillion-dollar data centers as "pilot models." Under a tax credit created in the 1980s to spur innovation, companies can get a rebate for supplies, but only if they are being tested in an experimental effort, not standard business operations. Meta is claiming that the costly AI computer chips it buys from companies, including Nvidia, are entitled to a taxpayer-provided discount as part of the experiment.The move caused some unease within Meta's finance department. The IRS in the past has challenged companies that claimed the credit for basic supplies. While thousands of companies, including other tech giants, get huge benefits from the research tax credit, they do so overwhelmingly for salaries paid to researchers and engineers -- the people carrying out innovation.Meta's use of the tax break for the data centers has not been previously reported. The New York Times reviewed securities filings and conducted multiple interviews, including with the people familiar with Meta's operations, who spoke on the condition of anonymity to discuss proprietary matters.The company started claiming the credit for the data centers two years ago. Since then, Meta's savings from the credit have soared, trimming almost $4 billion off its tax bill last year, filings show. Meta is now the biggest beneficiary of the tax credit among publicly traded companies, a Times review of securities filings found.Aggressive bets like these often pan out for big companies: Even if the IRS balks, companies can settle disputes and still wind up ahead.Meta is already in one sizable dispute with the IRS over this tax break, for using it to subsidize its CEO's multibillion-dollar pay package. In 2013, Meta claimed that $4.1 billion of stock options exercised by Zuckerberg counted as a research expense because he helped invent new software, such as Facebook's News Feed. The IRS is trying to claw back the company's resulting $355 million in tax savings, court filings show.The social media company's stock is soaring, and it is now worth nearly $2 trillion thanks in part to how its AI efforts have improved Instagram, WhatsApp and Facebook. This month, Meta released Muse, a personal AI agent that immediately became the most downloaded app for iPhone and Android users. Meta and other tech giants' AI efforts have also been helped by an accelerated write-off for research and development expenses that stemmed from the "One Big Beautiful Bill Act," passed in 2025."Meta is one of the largest investors in research and development in the United States," said Andy Stone, a company spokesperson. "Over the last five years, Meta invested $200 billion in R&D -- $57 billion in the last year alone, advancing frontier research, building new technology and supporting American jobs. Like other companies that invest at this scale, we use the tax incentives Congress established decades ago to encourage this type of domestic investment." A Very Favorable Tax Credit The tax break dates to the first year of the Reagan administration, when Japan was a global leader in technological innovation. Business lobbyists and legislators were worried that America's fledgling tech sector would fall behind, so Congress created the Research & Experimentation Tax Credit as an incentive to take risks and invest in inventions that might not pan out commercially. A few years after the credit was created, a government report said it had been used to develop, among other things, electronic banking equipment and drugs to treat cancer.Tax rules already permitted tech companies to write off research expenses from their taxable income. The new credit was even more generous and could be taken on top of the deduction. But it was harder to qualify for. Companies have to meet a complex four-part test to prove they are running an experiment, not just rolling out a new product.In summer 2024, Meta was ramping up its efforts to compete in the Silicon Valley AI race, breaking ground on tens of thousands of acres of data centers across the country. This was an expensive endeavor. One of the biggest expenses of any AI data center was computer chips, which are made by companies like Nvidia and cost thousands of dollars each. A Meta employee overseeing the build-out had a creative idea to offset the costs: Tap the credit.The credit is meant to spur innovation by encouraging companies to tackle unsolved problems and technical challenges. While Meta is testing different physical layouts for server racks and looking for the best way to network thousands of chips for AI training, the chips themselves are known to work. They have been at the center of AI's progress for the last decade and turned Nvidia into the world's most valuable company.Some in Meta's finance department questioned whether this tactic would pass muster with the IRS, according to a person familiar with the matter. The IRS has rejected other companies' efforts to claim the credit for "proven and commercially available equipment and technology."The company sought advice from lawyers at multiple firms, who pointed to a relevant case from 2021, in which a federal judge denied the research tax break to an Indiana shipbuilder for the cost of building new types of vessels. Simply creating a new product wasn't enough; a company must pinpoint the specific components of a project that were technically uncertain and prove it used scientific experiments to overcome that uncertainty.One of the lawyers Meta consulted was Jeffrey Moeller at Ivins, Phillips and Barker, people familiar with the conversations said. Moeller represented pharmaceutical maker Bayer in a $200 million dispute with the IRS over research tax credits. In an interview, he would not comment specifically on Meta. But he did say the rules could permit claiming the credit on commercially available, proven products -- if they were supplies required to resolve the uncertainty of a project.Another lawyer consulted by Meta, those people said, was Alex Sadler, a former Department of Justice tax lawyer and now a partner at Morgan Lewis, which declined a request to interview him. But when he spoke at a tax conference in Virginia this month, Sadler said that pilot models were an "area of controversy" and that the IRS "doesn't like" when companies characterize commercial production as research to claim the credit. The IRS takes issue with the use of the research tax credit for "big things," he said."What if we have a $10 billion data center that does cool stuff that hasn't really been done?" he said. "Is all the cost a research expenditure?"After a few months of deliberation, Meta took the plunge. It started labeling chips bound for AI data centers differently for tax purposes from those sent to standard data centers, two people with knowledge of the matter said. Risky Business The strategy has been lucrative. Meta said the research tax credit shaved $2 billion off its taxes in 2024 and then $3.9 billion in 2025.That is a significant increase from the $700 million the company reported in 2023, the year before it embarked on its data center strategy.At the very top of the company, Meta executives kept the tax strategy close to the vest, two people with knowledge of the discussions said.But because the IRS was likely to challenge this new and untested accounting magic, the company had to acknowledge the risk in a securities disclosure called "unrecognized tax benefits." That is essentially the gap between what Meta paid to the IRS and how much it might owe if tax authorities challenge its maneuvers. It's a warning to investors that Meta made a bet, and the amount of the gap reflects the odds of losing, as determined by a company's tax advisers.Since Meta began its research credit AI strategy, the amount set aside to cover those tax bets increased 45% -- to $18.74 billion today from $12.9 billion two years ago. The contributing factor listed first in its annual financial filing is "uncertainties with our research tax credits."Other major tech companies, including Apple, Amazon, Alphabet and Microsoft, also report research tax credits of more than $1 billion a year. But none of them have flagged the research tax credit as a risk in their financial reports to investors or disclosed whether they have used it for AI data centers."Meta is claiming billions of dollars in tax benefits that its own accountants are telling investors are at risk of being overturned by the IRS," said Lisa De Simone, a former tax adviser at EY who teaches accounting at the University of Texas business school.Stone, the Meta spokesperson, said that "unrecognized tax benefits are simply a mandated accounting measure of uncertainty." He called them a "snapshot in time reflecting the status of unresolved issues and reflect many different types of uncertainties."Another of Meta's unresolved issues concerns one of the biggest U.S. Tax Court disputes in the country's history: The IRS is seeking nearly $16 billion in taxes and penalties on profits it says the company shifted to the Cayman Islands from the United States.Tax credit experts said Meta was again entering choppy waters by taking this huge tax break on data centers. Shawn Marchant, who runs the credit and incentives practice at Tanner and advised on the research incentive for more than a decade at EY, said he would be "skeptical" of claiming it for all the computer chips in all the data centers. Shevchuck, the tax adviser at BPM, proposed one way it might work: "If you had a data center that you're building out to cure cancer."Meta declined to answer questions about what made its AI data centers experimental, and why tens of billions of dollars of chips and computing equipment qualified for the research tax credit.Meta's auditor, EY, had to sign off on the plan. The global tax and accounting firm was among the firms that Meta consulted on using the tax credit in the first place. EY has since pitched other companies on using the research credit to buy computer chips for AI training. Innovation or Creative Accounting? James Shannon, a former U.S. representative from Massachusetts who sponsored the research tax credit in 1981, said it had been intended to support "people power, knowledge, information," and not "making things." He was surprised to hear that a technology company would use the credit for supplying AI data centers."This has gone way, way beyond what anybody could have imagined," Shannon said.Whether the tax break inspires the innovation that he and other lawmakers sought is a matter of debate. Some companies appear to use the credit for spending they would do anyway, according to a study last year by economists at the University of Southern California. If companies "simply reclassify existing spending as R&D," the researchers wrote, they are getting the tax breaks "without meaningfully financing innovation."The credit has become the second-most expensive federal corporate tax break, behind only the reduced rate applied to offshore profits. In its most recent estimate, the congressional Joint Committee on Taxation projected the credit would cost the government $32.1 billion in 2025. Meta alone would be responsible for more than a tenth of that.This article originally appeared in The New York Times.