Stock Option Deduction Debate: Journey Down the Rabbit Hole


Have you ever wished you’d coined a phrase? I wish I’d coined the phrase “curiouser and curiouser” from Alice in Wonderland. As time goes by, our laws and regulations and accounting pronouncements become, by virtue of amendments, inflation (without corresponding adjustments to the indices), interpretations, pronouncements, etc., so confused and conflicting that you have to be curiouser and curiouser just to understand how we got to where we are.

In the case of the deduction for stock options, there has been what many would consider to be a “great deal” going on for a long time. This is how it works. If a corporation grants a nonqualified stock option, it gets a deduction when that stock option is exercised in an amount equal to the amount by which the fair market value of the stock underlying the option exceeds the exercise price. This despite the fact that the corporation doesn’t have to outlay any cash for this spread. What a great deal! Many very profitable corporations have benefited greatly from what some would call a phantom expense. Think of a grinning kitty. This deduction has allowed many profitable corporations to plow more money into hiring, and arguably helped grow the economy immensely by encouraging corporations to align long-term shareholder value with worker incentives.

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