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Sen. Carl Levin wants financials and tax returns to show the same stock-option expenses.
Sarah Johnson, CFO.com | US
September 28, 2007
Sen. Carl Levin (D-Mich.) introduced a bill Friday that would change the way companies deduct stock-option expenses on their tax bills. The legislation, his third try at such a bill, could have added momentum because of the recent regulatory focus on accounting for stock options. Lawmakers' concerns about the disparity between executive and worker pay could also move the bill further along.
Levin criticized the "growing chasm" between executive pay and that of the rank-and-file in a press release announcing his bill. He also called the current accounting standards and tax rules for stock options "off-kilter," claiming they have led to "huge tax windfalls for companies that pay their executives with large stock grants."
Under FAS 123R — a hotly contested accounting standard passed by the Financial Accounting Standards Board in 2005 — companies expense stock options based on the fair value of the options on their grant date. That expense is amortized over the vesting period. On the other hand, companies deduct their stock-option expenses only when the options are exercised. If their stock performs well over the option's lifespan, they can take a tax deduction for an amount higher than what had been expensed for purposes of generally accepted accounting principles.
For his part, Levin claims that his proposed Ending Corporate Tax Favors for Stock Options Act will eliminate a "double standard" and their ability to deduct more than they were charged. The result could mean as much as an added $5 billion to $10 billion in annual tax revenue for the IRS, he adds.
The bill would require companies to limit their options-expense deductions to the expenses they showed on their financials. At the same time, they could deduct stock-option compensation in the same year that it's recorded on their books rather than when the options are exercised.