Levin Misses the Point

Levin Press Release on Corporate Stock Option Deductions

Levin incorrectly ignores the differences between tax and financial accounting for compensatory stock options. Levin compares the low financial accounting expense from the current grant of new out-of-the-money options to the higher tax expense from the current exercise of mature in-the-money options.  Levin forgets to note that financial accounting principles require immediate expensing of the current cost of employee options.  Current cost equals current fair market value which usually is a small amount when the exercise price of the option is significantly higher than the current fair market value of the stock. For example, the value of the right to pay $100 for stock currently worth $50 is probably quite low.  Thus the company’s expense for financial accounting would also be low. Levin also forgets that tax accounting requires a wait-and-see approach.  The company’s expense and the employee’s income are determined by the value of the option when it is exercised by the employee. This value is basically the market price of the stock less the amount paid on exercise of the option.  For example, if the value of the stock in the above example increases to $150 and the employee gets the stock for $100, the employee has $50 compensation income and the company takes a $50 compensation expense.  This makes perfect sense and Levin’s approach is perfect nonsense.

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