Sen. Carl Levin, D-Mich., has proposed a bill that would change the tax treatment of corporate stock option deductions.

Corporations are currently allowed to deduct a higher stock option compensation expense on their tax returns than is shown on their corporate books. Levin's bill, the Ending Corporate Tax Favors for Stock Options Act, would require the tax deduction to be consistent with the book expense and eliminate the existing corporate stock option deduction in the Tax Code.

Levin pointed out that executive stock options are one of the main reasons behind the growing disparity between pay for CEOs and the pay of the average worker. "Stock options are a huge contributor to executive pay," he said in a statement. "And a key factor encouraging companies to pay their executives with stock options is a set of outdated and misguided federal tax provisions that favor stock options over other types of compensation."

The bill would allow corporations to deduct stock option compensation in the same year it is recorded on the company's books without waiting for the stock options to be exercised. Levin's bill authorizes the Treasury Department to issue regulations applying the new deduction to stock options issued by a parent corporation to subsidiary employees.

The bill also makes executive stock option compensation deductions subject to the same $1 million cap on corporate deductions that applies to other types of compensation paid to top executives of publicly held corporations.

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