University of Wisconsin–Madison

How Congress Can Stop Corporations from Using Stock Options to Dodge Taxes

Type Policy Brief or Report
Year 2019
Level State
State(s) All States
Policy Areas Economic Justice
Corporations often compensate their CEOs and other top employees with stock options, which are contracts allowing the option holder to purchase the company’s stock at a set price for a fixed period. This is a problem because they allow corporations to report a much larger expense for this compensation to the IRS than they report to investors. Thus, corporations can report larger profits to investors, protecting or driving up the value of their stock, but smaller profits to the IRS, driving down their tax liability. This results in a stock option book-tax gap, the difference between how costs are reported on corporate books for financial accounting purposes versus how costs are reported on corporate tax returns for tax purposes, which has enabled corporations to avoid paying billions in federal and state income taxes. This report provides proposals to eliminate the book-tax gap and outlines the problems eliminating it would fix.

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