The NASPP Blog

August 9, 2011

Senator Levin, Still Trying

Earlier this summer, Senator Carl Levin (D-MI), introduced another bill that would limit corporate tax deductions for stock options to the expense recognized for them, the “Ending Excessive Corporate Deductions for Stock Options Act.” His cohort on this year’s bill is Senator Sherrod Brown (D-Ohio) (Senator Claire McCaskill, D-OH, has also signed on since the bill was introduced).

A Bi-Annual Event
I say “this year’s bill” because this is becoming a bi-annual event. Levin has been introducing bills like this for at least the past 20 years. He didn’t even bother to change the name of the bill this year. In fact, just for kicks, I did a redline comparison of this bill to his 2009 bill; the two bills are almost exactly the same. His co-sponsors have varied over the years but often include Senator John McCain (R-AZ). 

I blogged about Levin’s last bill in July 2009 (“Senator Levin Is At It Again,” and “More on Ending Excessive Corp Deductions for Stock Options“).

$25 Billion in Tax Revenue

The bill would limit the tax deduction corporations could take for stock options to the amount of expense recognized for them (i.e., the grant date fair value).  According to Levin’s press release, this would raise $24.6 billion in tax revenue over the next ten years (assuming, apparently, that the market doesn’t have too many more days like yesterday). The press release states that Levin has released IRS data showing that, from 2005 to 2009, corporations took tax deductions that were “billions of dollars” greater than the expenses shown on their financial statements. 

This is surprising to me because I’m not sure how the IRS would even have this data.  The tax deductions companies took in those years would relate to options that were granted in prior years–many may have been granted before FAS 123(R) (now ASC 718) even went into effect.  Comparing the tax deduction the company claimed to the option expense for that year is not a valid comparison. 

You can usually get an idea of whether a company’s tax deductions for stock compensation exceed the expense recorded for it from their financial statements, but most of the financial statements I’ve seen only provide this information in aggregate for all types of arrangements the company offers–stock options, restricted stock, RSUs, performance awards, ESPP, etc.  Levin’s bill only applies to stock options. 

Section 162(m)–No More Free Pass

The bill would also make stock options subject to the limitation on corporate tax deductions under Section 162(m).  Currently, stock options are exempt from the limit by virtue of being considered inherently performance-based (because the stock price must appreciate for the option to deliver a benefit).  This clearly would raise revenue–maybe that’s where a good chunk of the $25 billion comes from. What was the tax deduction your company claimed for the options exercised by your NEOs last year?

Given that, after twenty years, Levin still hasn’t had any success with this agenda, I think chances are nothing will happen with this bill either, so I don’t expect it to be a hot topic at this year’s NASPP Conference. But you can catch up on all hottest tax topics–straight from the IRS–with the session “The IRS Speaks” at the 19th Annual NASPP Conference.

It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course
The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience. 

Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting.  Register today so you don’t miss any more webcasts.

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