"expense deduction at time of exercise" But NOT at time of grant.
At exercise time there is a value certain (as certain as the stock is liquid, anyway) ... all can be converted to cash. At the same stroke, doesn't the IRS claim income to the person exercising the option? At least currently.
In 'the old days', seems as if the recipient declared income only when stock sold --- I don't know what the Co. declared re expense. The present method results in folks getting hosed by exercising and then having the stock crash before they can sell it. The result? You may owe millions and never even had any money at all. If congress wants to do something useful maybe they should prevent this. But in their zeal to make sure that 'the rich folks' not get away with anything ...
The problem is all things are approached ad-hoc. There are no principles involved. A 'command economy' approach. Internal consistency not required.
In the present, can companies decide on how to treat expense deduction at time of exercise, or is it a matter of tax code?
I guess there will be a 'factoring' market for buying up the 'value' of options at grant time, thereby converting that carefully calculated value to actual cash. Wonder how much discount there would be? I sure have had options that evaporated along with the companies. And, when granted, they were VERY valuable. My guess is that for any early stage co., the options, on average, have close to zero value. Any way to 'reverse' an expense that causes funding to be missed and co. to tank? Perhaps they even have negative value. Certainly an opportunity for a great business. $Billions/yr. Perhaps Mr. Buffet would start it.
In reality, IMHO, the IRS will never permit a created number to be SUBTRACTED from a tax bill UNLESS specifically mandated by law. They happily ADD created numbers, such as tips (computed according to where you work, the employer having clear the % w. IRS --- differs by industry, shift, etc, etc.). Employee, however, is responsible.
Further, would these option 'values' be considered like a reserve account to be adjusted in bulk from time to time? Based (as reserve for bad debt, etc) on actual 'experience'? Will the 'expense' be carried forward to a purchasing company? Would all the states treat it the same way? My, my. So many tasks for lawyers and accountants to argue. More vigorish.
"companies claim a tax deduction for stock option expense with the IRS .. not .. to shareholders"
I don't think that I, the shareholder, object too strenuosly about legally increasing expense reporting to IRS, whether or not I am told. It would be useful to have access to (a synopsis of) the tax return ...
Conversion from balance sheet to income ... don't like that.
But then I'm no expert. I do, however, tend to blather.
Robert |
