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Thursday, April 25, 2013

CTJ: Stock Option Tax Break Saved Fortune 500 Corporations $27 Billion Over Past Three Years

CTJCitizens for Tax Justice, Executive-Pay Tax Break Saved Fortune 500 Corporations $27 Billion Over the Past Three Years; Apple & Facebook Biggest Beneficiaries of Stock Option Loophole:

Earlier this year, Citizens for Tax Justice reported that Facebook Inc. had used a single tax break, for executive stock options, to avoid paying even a dime of federal and state income taxes in 2012. Since then, CTJ has investigated the extent to which other large companies are using the same tax break. This short report presents data for 280 Fortune 500 corporations that, like Facebook, disclose a portion of the tax benefits they receive from this tax break.

  • These 280 corporations reduced their federal and state corporate income taxes by a total of $27.3 billion over the last three years, by using the so-called “excess stock option” tax break.
  • In 2012 alone, the tax break cut Fortune 500 income taxes by $11.2 billion.
  • Just 25 companies received more than half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past three years.
  • Apple alone received 12 percent of the total excess stock option tax benefits during this period, enjoying $3.2 billion in stock option tax breaks during the past three years. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.
  • In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks.
  • Over the past three years, Apple slashed its federal and state income taxes by 20 percent using this single tax break.

How It Works: Companies Deduct Executive Compensation Costs They Never Actually Paid
Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages).

Before 2006, companies could deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income. Some observers, including CTJ, argued that the most sensible way to resolve this would be to deny companies any tax deduction for an alleged “cost” that doesn’t require an actual cash outlay, and to require the same treatment for shareholder reporting purposes.

But instead, rules in place since 2006 maintained the tax write-off, but now require companies to lower their “book” profits somewhat to take account of options. But the book write-offs are still usually considerably less than what the companies take as tax deductions. That’s because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with much bigger tax write-offs than the amounts they deduct in computing the profits they report to shareholders.

(Hat Tip: Francine Lipman.)

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Didn't these companies merely transfer their tax liability to the option recipients? With personal tax rates exceeding corporate tax rates, wouldn't the government benefit from this behavior?

Posted by: AMTbuff | Apr 25, 2013 11:28:09 AM

AMTbuff above is correct. Stripped of the smoke and fury, CTJ and other advocates of "reforming" the corporate tax deduction for employee stock options truly aim to extend the double taxation of corporate profits to run-of-the-mill employee compensation programs.

Posted by: Jake | Apr 25, 2013 2:02:29 PM

If you deny the tax deduction because it is paid in stock and not in cash, it would take about 30 seconds for companies to decide to instead issue new stock to the public and use the proceeds to pay cash to employees. End of argument about a tax deduction with no cash outlay. The financial treatment of the cost of options is what needs to be reformed not the tax treatment.

Posted by: Mark | Apr 26, 2013 10:18:54 PM