Congressional Research Service Disagrees with Sen. Levin on Stock Option Deductions

In its report titled Employee Stock Treatment and Tax Issues (No. RL31458), the Congressional Research Service (CRS) finds that the current tax treatment of stock options is not abusive. The report is in response to Sen. Carl Levin's bill, the "Ending Excessive Corporate Deductions for Stock Options Act" (S. 1375). The bill would limit deductions to what the company declares as a compensation cost on its income statement, not the value of the spread on exercised options. In the case of Facebook, the options were expensed as low as six cents per share but exercised at $38, creating a $500 million deduction. But the CRS notes that this disconnect only occurs because the tax calculation and accounting calculation are done at different times for different reasons. The timing of the deduction to coincide with exercise is appropriate, the CRS says, because that is also when the employee recognizes (and pays tax) on the income. The windfall is, in effect, taxed the same way as any other compensation, meaning, the CRS concluded, that "there is generally little, if any, tax advantage to these options."