As I write this blog, the buzz is escalating around the imminent IPO of social media site Twitter. I don’t think there’s been this much anticipation for an IPO since Facebook joined the ranks of public companies last year. It’s like the perfect storm of variables – stock compensation, hot IPO, and the prospect of significant wealth. Yet, with every party there are “party poopers”, and the Twitter party is no different. That’s why I wasn’t entirely surprised when Senators Levin and McCain tried to crash the party yesterday with a joint statement pushing once again to eliminate the corporate tax deductions on stock compensation.

What is it this time?

It’s likely the Senators are following the lead of Citizens for Tax Justice (a left-leaning tax activist and research group), who earlier this week released results of an analysis of 11 public companies and Twitter, suggesting that the cumulative corporate tax deductions in the coming years for these 12 companies would be in the billions of dollars. So what is new and different in the latest argument that companies are somehow avoiding paying taxes on stock compensation and that this “loophole” should be avoided? Well, not much. There have been many NASPP Blogs on this topic in the past, so I’ll let you catch up on the nuances of the corporate tax deduction through those. The latest justification the Senators offer for ending this perfectly reasonable deduction appears to be that “…given the deficit and damaging sequester cuts facing this country, this corporate stock option tax deduction is the kind of tax loophole that ought to be closed.” Huh? Now this is the solution to a slew of other fiscal issues?

Another Battle in a Long War…

Senator Levin has been waging this battle for years, so it seems every time there is a new opportunity, he’ll raise the issue again, with a new twist. The reality is, and this is often overlooked in media analysis of the Senators’ calls to action, for every dollar of corporate tax deduction taken for stock compensation transactions, there is a dollar that is taxable income to an employee. Companies are not “avoiding” paying tax – the tax is being paid by the employee. Another tidbit I’ll point out is that starting January 1, 2013, the maximum individual tax rate was increased to 39.6% – higher than the highest corporate rate of 35%. So by taxing the individual rather than corporations on significant stock compensation gains, the IRS actually is likely to fare better. For example, if Mark Zuckerberg of Facebook makes $1 billion in stock compensation gains he would theoretically be taxed at 39.6% on the vast majority of his gains. Facebook would get a corresponding $1 billion tax deduction, reducing the company’s taxable income (which, let’s hypothetically say is taxed at 35%). I’m simplifying this – but you get the gist.

How Does Financial Reporting Factor In?

Another argument the Senators are raising (and not for the first time) is that stock compensation tax deductions should not exceed the amount of accounting expense recorded by the company in its financial statements. To that I say “who cares?”. Accounting and tax are two completely different animals, with completely different intents. It’s reasonable and common for the two to be misaligned.

Moving On…

I’m guessing that this latest effort by the two Senators will be short lived, just as in prior instances. Let’s hope so, or I’ll have to invest in a larger bandwagon and bigger megaphone, because I vehemently disagree with Senators Levin and McCain on this issue. I’m also getting kind of tired of the party crashing. Can’t we just bask in the enjoyment of another successful stock compensation IPO without the grumbling about corporate tax deductions? It’s time to move on.

-Jennifer