Recently introduced legislation by Senators Carl Levin (Democrat – Michigan) and Sherrod Brown (Democrat – Ohio) would end the ability for corporations to deduct stock option expenses from their taxable income at amounts greater than those reported on their financial statements.

Sounds fair, right?  Read on.

According to the Joint Committee on Taxation the measure known as “The Ending Excessive Corporate Deductions for Stock Options Act” would reduce the federal budget deficit by almost $25 billion over 10 years.

Seems like a good idea from a revenue standpoint, right?  Read on.

Said Senator Levin, “Current stock option accounting and tax rules are out of kilter, lead to corporations reporting inconsistent stock option expenses on their tax returns versus their financial books and often produce huge tax windfalls for corporations that pay their executives with large stock options grants.  This windfall produces excess corporate tax deductions totaling as much as $60 billion in a single year which costs the U.S. Treasury billions of dollars a year in lost tax revenue.  In effect it’s a taxpayer subsidy for the pay of corporate executives.  It’s a tax break we can no longer afford and ought to end.”

Sounds like grandstanding and demonizing of an unpopular segment of society for political gain, right?  It is!

The difference in reporting of stock option expenses for accounting and tax purposes is not a tax loophole.  Rather it’s a difference in timing.  For accounting purposes companies get an “early” deduction under GAAP.  For tax purposes under the matching principle companies get a deduction in the year employees exercise stock options.  Changing tax rules per this Democratic legislation does not close a non-existent loophole – it accelerates Treasury’s receipt of income.

Sounds like Senators Levin and Brown are ignorant or greedy, right?  Right on!