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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (50)	6/15/2002 11:30:44 AM
From: rkral	Read Replies (3) \| Respond to of 786

... employee compensation expense due to exercise of stock options is not shown on the financial statements ... Huey, you have missed the point (somewhere in the few posts of this thread) that *employee compensation expense due to option exercise is not a real expense. That's why I called it a phantom expense. Clark Hare indicated agreement. That is why the expense does not .. and should not .. appear in the financial statements. If you follow the specifics of the Levin/McCain bill back into the tax code, you will find the option tax credit exists under the guise of a "research and development tax credit" in the existing tax code. As an engineering manager of a small communications company, at the end of every financial period, I had to decide what percentage of the costs, for each engineering project during that period, was due to "basic research" versus "product development". The reason: basic research was eligible for a tax credit, product development was not. As a result, when I first learned recently that stock-based compensation costs were eligible for a tax credit just like basic research costs (under the same tax code, I believe), I was appalled. Just how much does the CEO or marketing or sales managers have to do with basic research? I'm sure it's very little. Now the effective result of the "R&D tax credit" was that the company was able to "deduct" basic research costs twice. The first time as a normal business cost. The second time as the basis for the tax credit. Obviously, we didn't incur the costs twice .. so the second "deduction" was for a phantom cost. Why? Congress, which writes the U.S. tax code, wishes to promote basic research, to maintain technological leadership, to start more companies, to create more jobs, and increase the domestic gross product. My WAG is that, sometime in the past, this same type of argument was used to justify a tax credit for employee stock options. Congress let the R&D tax credit be applied to options to help start new companies, many of which would be in the technological arena, to create ... etc. I think it's a legit idea .. and I'm willing to see a little general taxpayer money be used to help make growth happen .. but the application of the idea has gone wild. So getting back on point .. the stock-based compensation expense due to option exercise is not a real expense .. but Congress has seen fit to provide a tax credit for options .. to assist in technological growth .. and technological leadership of the U.S.* Clark Hare was much more direct when he said the tax credit for option exercise was "corporate welfare". Mostly JMHO, Ron