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Strategies & Market Trends : Zeev's Turnips - No Politics
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To: Win-Lose-Draw who wrote (30723)2/18/2002 11:01:56 AM
From: Boca_PETE  Read Replies (1) of 99280
 
Win-Lose-Draw: RE:("Is it true that companies get to deduct the "expense" of this compensation from their taxable income?")

YES - it is better than a free ride. Employers are allowed to deduct on their corporation income tax returns the value of a nonqualified stock option as a business expense for the tax year in which the option is included in the gross income of the employee. The deduction amount is the same as the amount included by the employee as individual gross income. IRC Section 83(h). That means that the Provision for Income Tax Expense that corporations report on the income statement INCLUDES the tax benefit from such stock option expense deducted on the tax return of the company.

- IMHO, THIS IS A GIFT to companies because no assets leave the company to pay such stock option compensation. The compensation is funded directly by shareholders in a shareholder-to-shareholder transaction upon resale of the shares obtained from exercise of the stock option. IMHO if any rules need to be changed, it's the tax rules that give this stock option expense deduction gift to companies.

Tax rules for stock options applicable to individuals and corporations are complex. I would recommend that you consult with your tax advisor for more information if you are interested.

Tax rules are designed by politicians not only to raise revenue to run the government, but also to redistribute income and grant special favors. The tax rules are not necessarily fair and do not necessarily have anything to do with GAAP reporting. The tax rules represent political comprise that often turn into convoluted regulations.

- Best example of this is the new individual tax rule from last May's tax act which "phases out the phase-in of the phased-out of itemized deductions." <grn>

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