New Legislation Would Cap Stock Option Deduction for Corporations

July 22, 2011

As Congress looks for ways to address the country’s fiscal crisis, Senators Carl Levin (D-MI) and Sherrod Brown (D-OH) have introduced legislation that would eliminate the exemption for stock options granted to the executive officers listed in the proxy under section 162(m) of the Internal Revenue Code.  Stock options are currently expensed for tax purposes in the year they are exercised.  The deduction is equal to the difference between the market price of the stock and the exercise price of the option on the date the options are exercised.  Under section 162(m) of the Internal Revenue Code, companies currently may only deduct cash compensation up to $1 million annually for the proxy officers, but there are exceptions for incentive-based compensation subject to certain rules and stock options, which are inherently performance-based.  The Ending Excessive Corporate Deductions for Stock Options Act (S. 1375) would eliminate the exception for stock options, and thus seek to limit senior executive compensation granted through stock options.  The bill would also make corporate tax filings consistent with accounting rules by requiring stock options to be expensed by companies in the year they are granted.  This change would generate an estimated $25 billion in revenue.  “Current stock option accounting and tax rules are out of kilter . . . and often produce huge tax windfalls for corporations that pay their executives with large stock option grants…. It’s a tax break we can no longer afford and ought to end,” said Levin.