The NASPP Blog

July 28, 2009

Senator Levin Is At It Again

Last week, Senators Carl Levin (D-MI) and John McCain (R-AZ) introduced the “Ending Excessive Corporate Deductions for Stock Options Act.” S.1491 would limit the tax deduction companies can take for stock compensation to the amount of expense recognized for that compensation in their P&L.

Play It Again, Carl
By my count, this is the fourth time that Levin has introduced a bill of this nature, always with a clever title: in 2007 it was the “Ending Corporate Tax Favors for Stock Options Act” and in 2003 it was the “Ending the Double Standards for Stock Options Act” (he reused this title several times). Before he was sponsoring bills on tax deductions for stock compensation, Levin sponsored bills to require companies to expense stock options as early as 1991–before even the original FAS 123 was issued. McCain has been a co-sponsor on a number of these bills.

Not Such a Bad Thing?

From the perspective of granting corporations, I’m not sure Levin’s bill would really have the impact he intends–which is to discourage the use of stock options. Sure, back in the halcyon days of APB 25, when companies could realize tax deductions without recognizing expense for stock options, this legislation would have been a real buzz-kill. But now, promising companies that they get a tax deduction for any expense recognized in their income statement might be a welcome relief, given the number of companies recognizing expense for underwater stock options and not seeing any tax savings for the expense.

And accounting for tax benefits would be far simpler under Levin’s bill. There would be no excess deductions or shortfalls and no APIC pool to keep track of (at least not for stock options, you’d still have to worry about all this for your ESPP and full value awards).

Lost Tax Revenue?

But, from the perspective of the broader societal good, Levin’s bill could seriously impact tax revenue. Currently, companies receive a tax deduction only when employees recognize income on stock plan transactions. The lost tax revenue from the corporate deduction is at least partly offset by the additional taxes paid by the individual. Not so under Levin’s bill. I suspect that Levin is thinking that the expense recognized (and thus the corporate tax deduction available under his bill) pales in comparison to the enormous gains recognized by executives upon exercise of their options, but I’m not sure this is the case. In January, I heard estimates that close to 100% of CEOs at Fortune 500 companies held underwater options. I bet that those companies would be thrilled to get a tax deduction equal to the expense recognized for those options.

But Wait, There’s More to Come

Tune in next week, when I’ll discuss the impact of Levin’s bill on ISOs and restricted stock and even look at whether a couple of companies would have realized greater tax deductions under the current tax code or Levin’s bill.

NASPP Conference Workshop of the Week
This week’s session is “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant.” Compensation consultants are tasked with designing stock plans tailored to meet the unique and divergent needs of their clients, while plan administration providers have a goal of delivering products and services with one-size-fits-all functionality. In-house administrators are caught in the middle, often left to oversee plans that aren’t supported by existing administrative solutions. This panel will address how to proactively marry plan design with plan administration, offering tips to help both third-party administrators and consultants reach an acceptable compromise. The panel will also discuss what to do when it’s too late–how to administer a plan for which there are no readily available administrative solutions.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara