A new bill from a pair of Democratic senators would eliminate a tax break on corporate stock options.
Carl Levin
The bill was introduced Friday by Sen. Carl Levin, D-Mich., and Sherrod Brown, D-Ohio. It would end the ability for corporations to deduct expenses for stock options from their taxes at greater amounts than the expenses in their financial statements. The measure would reduce the federal budget deficit by $24.6 billion over 10 years, according to the Joint Committee on Taxation.
“Current stock option accounting and tax rules are out of kilter, lead to corporations reporting inconsistent stock option expenses on their tax returns versus their financial books, and often produce huge tax windfalls for corporations that pay their executives with large stock option grants,” Levin said in a statement. “This windfall produces excess corporate tax deductions totaling as much as $60 billion in a single year, which costs the U.S. treasury billions of dollars a year in lost tax revenue. In effect, it’s a taxpayer subsidy for the pay of corporate executives. It’s a tax break we can no longer afford and ought to end.”
The Ending Excessive Corporate Deductions for Stock Options Act, also known as S. 1375, would require that corporate tax deductions for stock options not exceed the expense shown on corporate financial reports filed with the Securities and Exchange Commission. The Joint Committee on Taxation has estimated that ending this tax break would raise $24.6 billion in corporate tax revenues over ten years.
According to IRS data released by Levin, from 2005 to 2009, corporations as a whole took U.S. tax deductions for stock options that were billions of dollars larger than the expenses shown on their financial statements, ranging from $12 billion to $61 billion a year. In 2005, 2007, and 2008, about three-quarters of all the excess deductions were claimed by just 250 corporations.
A variety of organizations have endorsed the bill, including the AFL-CIO, Citizens for Tax Justice, Consumer Federation of America, OMB Watch, and Tax Justice Network- USA.
The prospects for passing the bill in Congress, where most Republicans remain staunchly opposed to tax increases of any kind, are remote. However, the proposal could play a part in the ongoing debate over reducing the budget deficit. This week, Republicans plan to vote on a bill providing a Balanced Budget Amendment that would require a supermajority in Congress to agree to any future tax increases.
The Levin-Brown bill would have corporations deduct stock option compensation on their tax returns in the same year it is recorded on the corporate books, without waiting for the options to be exercised; ensure that research tax credits employ the same method for calculating stock option pay expenses when computing wages eligible for the tax credit.
The bill would leave unchanged the stock option compensation rules for individuals, or for incentive stock options under Section 422 of the Tax Code, which may be used by startup companies and other small businesses. The proposed legislation would also create a transition rule to ensure stock options granted before the enactment date of the law are tax deductible; and make stock option deductions subject to the existing $1 million cap on corporate tax deductions for compensation paid to top executives of publicly held corporations.
6 Comments
US executive compensation leads the world in its high totals almost across the board. The US also leads the world in its debt, debt per citizen, debt er hosehold and any other way one wants to measure it - and the "natinal debt" excludes present value of future entitlements! It is high time the "high income bracketeers" - a term my Stanford Biz Schol Economics Prof described it about 50 years ago - and their employers get a well deserved haircut.
Moose | July 19, 20114:15 p.m.
Posted by: berttedwards | July 19, 2011 3:13 PM
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One of the problems with the bill is that the early recognition of the stock option, without a disallowance of the actual occurence, will result in at least a double taxation (because when the options are exercised, the income would be recorded). Keep in mind that this bill seeks only to impact non-union organizations. This is why the AFL-CIO supports it, because just like all of the other legislation the Democrats are proposing, unions are singled-out for tax avoidance (great payback for huge campaign donations, don't you think?!).
Posted by: lammip | July 19, 2011 11:10 AM
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I'm not sure how anyone can say it costs the Treasury anything. The Treasury and the government does not do anything to earn money and hence is entitled to only what the law permits in taxation. It is not like the corporations are doiing other than what Congress and the US President of a bygone era instituted as rules. Let's not make corporate Amererica the fall guy or try to lay blame on it.
Posted by: BrianL | July 19, 2011 10:15 AM
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I completely disagree with this proposal. The tax deduction for stock options matches the income reported on the employee's W-2. The company takes a deduction when the employee has wages to report. The problem is not with the tax code, it is with the GAAP reporting of stock option expenses.
Changing the tax code to match GAAP gives the government a windfall of collecting the taxes from a corporation for stock options that were not exercised.
The corporation is not doing anything wrong. It is reporting its financial statements under GAAP accounting rules, and reporting the options for tax under the matching principal of any other wage deductions: The company gets a deduction when the employee has income.
This is a very bad idea.
Posted by: DLK | July 19, 2011 10:12 AM
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The current tax accounting is a deduction for the actual cost when exercised and that is the amount upon which the employee is taxed, so there is no "loophole."
The difference between tax and financial accounting is that there is a recorded at the time of issue a cost recorded, generally based upon the Black-Scholes formula. That calculation takes into account the possibility of an early exercise and/or forefitures, but it is nothing but a formula that may have little revelence to actual cost as it in affect projects that the future will mirror the past.
The reality is that, under current financial accounting, a deduction is taken early for book purposes than for tax purposes.
Me thinks that the congressmen know not of what they speak, but then what's new.
Bill
Posted by: welliscpa | July 19, 2011 10:08 AM
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I agree with this proposal. Executive compensations are out of control and executives are still receiving large compensation via stock options prior to restoring lost jobs due to a downward economy. Corporations need to grow the U.S. economy, without doing so, these executives will loose out in the long run as well.
Also, this is not a tax increase as much as changing the reporting of expenses/deductions taken. The financial reporting should be the same as tax, but unfortunately corporations are playing the shell game by reflecting inflated financials to pacify their shareholders.
Posted by: MLF | July 19, 2011 9:28 AM
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