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Levin Bill To End Corporate Tax 'Favors' For Stock Options

by Leroy Baker, Tax-News.com, New York

01 October 2007


Senator Carl Levin has introduced legislation which eliminates the current favored tax treatment of corporate stock option deductions, whereby corporations are allowed to deduct a higher stock option compensation expense on their tax returns than shown on their financial books.

Under Levin's Ending Corporate Tax Favors for Stock Options Act, a new corporate stock option deduction will be created under the US tax code, requiring the tax deduction to be consistent with the book expense. The bill also eliminates the existing corporate stock option deduction under tax code section 83(h) allowing excess deductions.

Other features of the bill include provisions that:

  • Allow corporations to deduct stock option compensation in the same year it is recorded on the company books, without waiting for the options to be exercised.
  • Make a conforming change to the research tax credit so that stock option expenses under that credit will match the deductions taken under the new tax code section 162(q).
  • Authorize the Treasury to issue regulations applying the new deduction to stock options issued by a parent corporation to subsidiary employees.
  • Establish a transition rule applying the new deduction to stock options exercised after enactment, permitting deductions under the old rule for options vested prior to adoption of Financial Accounting Standard (FAS) 123R (on expensing stock options) on June 15, 2005, and allowing a catch-up deduction in the first year after enactment for options that vested between adoption of FAS 123R and the date of enactment.

The bill makes no change to stock option compensation rules for individuals. However, it would eliminate favored treatment of corporate executive stock options under tax code section 162(m), by making executive stock option compensation deductions subject to the same $1 million cap on corporate deductions that applies to other types of compensation paid to the top executives of publicly held corporations.

According to Levin, the increasing use of stock options by corporations to remunerate executives is the driving force behind escalating CEO pay, which he revealed is now on average 400 times higher than that of the average worker.

"A key factor encouraging companies to pay their executives with stock options is a set of outdated and misguided federal tax provisions that favor stock options over other types of compensation," he observed upon introducing the bill. "That’s why I am introducing today a bill to eliminate federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options."

"Stock options are the only type of compensation where the federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation – cash, stock, bonuses, and more - the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options." he concluded.

A comprehensive report in our Intelligence Report series examining Expatriate Taxation and Reward Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report10.asp

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