Corporate Stock Option Tax Deduction in the Cross-Hairs Yet Again

Tax and Accounting

Last week, Sen. Carl Levin (D-MI) recycled his proposal to limit tax deductions for exercised stock options by including it in the “Cut Unjustified Tax Loopholes Act” (S. 268), which he introduced in an effort to offset the budget cuts that would be imposed by sequestration.  The stock options proposal, which Sen. Levin has introduced in previous Congresses as the “Ending Excessive Corporate Deductions for Stock Options Act,” would limit corporate tax deductions for stock options to the accounting expense shown on the company's books when options are granted.  Currently, companies can take a deduction for the compensation realized by any employee when stock options are exercised.  The proposal also would change the treatment of stock options as performance-based compensation under section 162(m) of the tax code.  This change would reduce the deductions for stock options by including compensation realized from stock options exercises toward the $1 million limit on non-performance-based deductible compensation for the CEO and other covered executives.  Sen. Levin described the proposals as eliminating “a loophole that allows large corporations to exploit what is in effect a federal subsidy that helps pay for the compensation awarded to their executives.”  However, under his approach, companies would be able to take a deduction for stock options that may never produce compensation if the stock price declines.  Some estimates predict that the provision would raise $25 billion over 10 years.  The full bill, which also limits tax deductions for companies that move operations offshore and increases taxes on carried interest received by hedge fund managers, is estimated to save as much as $200 billion over 10 years.