OT .. The IRS calculates the cost to shareholders IN EXACTLY THE SAME WAY I DO and applies this tax credit to avoid double taxation
Let's test the phrase "to avoid double taxation".
First, assume the phrase is correct. If we have double taxation without the "tax credit" ("Tax benefit from exercise of stock" in QCOM 10-Ks), then we should have normal (single) taxation with the "tax credit".
The employee's monetary gain (per share) upon exercising a stock option is the intrinsic value of the option on the exercise date. The employee pays ordinary income taxes on the gain on NQSOs .. and is paying his/her fair share of federal taxes (ignoring other taxes here), imho.
The company receives a "tax credit" on the same amount on which the employee pays taxes.
Assume the federal tax rates for the company and the employee are identical, e.g., 33% .. very plausible rates for both. So now the tax amounts are identical, e.g., $20 (per share) of exercised stock.
Now let's examine what happened in Uncle Sam's pockets. The employee put $20 in the left pocket. The company took $20 from the right pocket. Sam is no richer or poorer than before. As far as Uncle Sam is concerned, the $20 may just have well gone directly from the employee to the company. (Of course, paying 'taxes' to the company wouldn't fly, so someone had to involve Sam as the middle man.)
Since the taxes paid by the employee didn't end up in Uncles Sam's pocket .. we can conclude that we really don't have single taxation with the tax credit. Therefore , the original premise, "to avoid double taxation" without the tax credit, is false.
But now some people will be doubly pissed off. First, as shareholders, they see themselves being fleeced by the earnings dilution caused by stock options. Second, as taxpayers, they see that the compensation tax (on option income) the employee is presumably paying Uncle Sam, is actually ending up in the coffers of the company.
Come to think of it, I'm pissed off too! What benefit(s) to the general public, due to employee stock options, justifies my paying part of someone else's taxes?
Mostly JMHO, but based on fact to the best of my knowledge.
Ron |
