Home Blog Employee Stock Options: Tax Loophole or Tax Deduction? Much has been said about some of the high profile IPOs in recent years Zynga, Facebook, Groupon, LinkedIn questioning whether the tax deduction that the corporations are receiving is justifiable when the companies have a pre-tax income. Facebook is an excellent example.

Pre-tax, they managed to swing to a profit. Net Operating Loss carry forward not the subject of this blog post occurs when a corporation has a loss in prior years.

The Tax Code allows this loss to be offset against future profits for a certain period of time. The Tax Code allows a corporation to deduct the actual value of exercised stock options.

Tax Topics - Topic Stock Options

This has become a contentious issue. Senator Carl Levin D—MI has proposed a bill which would eliminate the corporate tax deduction for exercised stock options.

This blog entry will focus on the arguments surrounding the debate concerning the deductibility of exercised non-qualified Employee Stock Options ESOs.

According to FASB ASC , employee stock option compensation expense is determined by generating a fair value of the option and expensing that fair value over the requisite service period.

FASB does not require a specific option pricing model be utilized, but the model must contain at least the underlying stock price, exercise price, expected term, expected volatility, risk-free interest rate, and expected dividends. The compensation expense for equity compensation will be the fair value of the option multiplied by the number of options granted. There are some other calculations involved, such as the estimation of forfeitures.

We will not be with estimated forfeitures for the purposes of this blog post. The actual taxable expense when the non-qualified employee stock options are exercised is the spread between the exercise price and the fair market value of the stock on the exercise date. If the taxable expense at the time of exercise is greater than the fair value of the employee stock option that was expensed at the grant date for GAAP purposes, the company would obtain the resulting deferred tax asset and deferred tax benefit.

Starting in , Senator Carl Levin proposed the Ending Excessive Corporate Deductions for Stock Options Act.

Incentive stock option - Wikipedia

The Act, which has been reintroduced in and , would require companies to book an income tax expense that would be no greater than the compensation expense fair value of the options as of the grant date. The pros of requiring public companies such as Facebook to expense only the fair value at time of grant would be increased tax revenue to the United States Federal Government, State Governments, and Local Governments.

The cons are as follows: Many tech companies, including Facebook, grant stock options and equity compensation as a way to entice talented employees to work for a start-up company. Mature companies utilize equity compensation to retain employees from defecting to competitors and align to employee interests with shareholder interests. Opponents to the change in tax law would also point out that when an employee exercises a non-qualified employee stock option, they are paying individual ordinary income taxes as high as Also new in is the additional Medicare Tax of 3.

Ordinary Income such as non-qualified stock option exercise is also subject to Social Security Taxes, Medicare Taxes, and Federal Unemployment Taxes. This, in the opinion of many tax experts, would amount to another form of corporate double taxation, similar to the taxation of ordinary dividends.

There is much debate over the taxation of non-qualified employee stock options.

Incentive Stock Options - TurboTax Tax Tips & Videos

This has become an important issue within the overall framework of income tax reform. Although there are merits to both arguments on reforming the corporate taxation of employee stock options, a measured approach is needed so that companies would be able to continue to attract key talent and retain key employees. Solutions fair value ASC ASC ASC Products software FinTools XL OPTIONS XL EXOTICS XL BONDS XL UTILITY XL RISK XL Software Authentication Statement FAS Toolkit Feature Comparison Function Comparison Option Tracker OT Administration OT Valuation Financial Reporting FinCalcs BondsCalc ExoticsCalc OptionsCalc VolatilityCalc Lattice Option-Pricing Model Services consulting ASC ESO Valuation PPT Valuation TSR Valuation Expected Term Expected Volatility Expected Volatility Template Historical Volatility Implied Volatility Peer Group Volatility Volatility Estimation Process Outlier Analysis ASC ASC Plan Design Training Seminars Support updates Support Request Updates Feedback Support Grid Resources calculators Publications White Papers Best Practice Series Working Papers Blog Learning Financial Data Online Calculators OptionsCalc Online ExoticsCalc Online ProbabilityCalc VolatilityCalc About company About Us Contact Staff Customers Testimonials Target Markets Careers.

Blog Home Blog Employee Stock Options: There are a couple of reasons for this situation: Net Operating Loss carry forward Net Operating Loss carry forward not the subject of this blog post occurs when a corporation has a loss in prior years.

Equity Compensation Tax Deduction The Tax Code allows a corporation to deduct the actual value of exercised stock options. GAAP Booked Expense versus Income Tax Expense According to FASB ASC , employee stock option compensation expense is determined by generating a fair value of the option and expensing that fair value over the requisite service period. What Senator Carl Levin is proposing Starting in , Senator Carl Levin proposed the Ending Excessive Corporate Deductions for Stock Options Act.

Pros and Cons of the Levin Proposal The pros of requiring public companies such as Facebook to expense only the fair value at time of grant would be increased tax revenue to the United States Federal Government, State Governments, and Local Governments.

Summary There is much debate over the taxation of non-qualified employee stock options. Related Posts No related posts found. Categories ESOs Monetary Policy News Stock Markets Treasury Interest Rates TSRs.

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