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Tax Benefits From Options as Windfall for Businesses
And here is a video of a lion who cannot figure out why people are not frantically fleeing his frightful roar:
It's humiliating, is what it is.
The stock market’s rebound from the financial crisis three years ago has created a potential windfall for hundreds of executives who were granted unusually large packages of stock options shortly after the market collapsed.Ed. note: When the article says "major corporations doled out" the options, what it means is, the executives of the corporations chose to dole out to themselves the options, aware of their tax treatment.
Now, the corporations that gave those generous awards are beginning to benefit, too, in the form of tax savings.
Thanks to a quirk in tax law, companies can claim a tax deduction in future years that is much bigger than the value of the stock options when they were granted to executives. This tax break will deprive the federal government of tens of billions of dollars in revenue over the next decade. And it is one of the many obscure provisions buried in the tax code that together enable most American companies to pay far less than the top corporate tax rate of 35 percent — in some cases, virtually nothing even in very profitable years.
In Washington, where executive pay and taxes are highly charged issues, some critics in Congress have long sought to eliminate this tax benefit, saying it is bad policy to let companies claim such large deductions for stock options without having to make any cash outlay. Moreover, they say, the policy essentially forces taxpayers to subsidize executive pay, which has soared in recent decades. Those drawbacks have been magnified, they say, now that executives — and companies — are reaping inordinate benefits by taking advantage of once depressed stock prices.
A stock option entitles its owner to buy a share of company stock at a set price over a specified period. The corporate tax savings stem from the fact that executives typically cash in stock options at a much higher price than the initial value that companies report to shareholders when they are granted.
But companies are then allowed a tax deduction for that higher price.
Dozens of other major corporations doled out unusually large grants of stock options in late 2008 and 2009 — including Ford, General Electric, Goldman Sachs, Google and Starbucks — and soon may be eligible for corresponding tax breaks.
“These options gave executives a highly leveraged bet that stock prices would rebound from their 2008 and 2009 lows, and are now rewarding them for rising tides rather than performance,” said Robert J. Jackson Jr., an associate professor of law at Columbia who worked as an adviser to the office that oversaw compensation of executives at companies receiving federal bailout money. “The tax code does nothing to ensure that these rewards go only to executives who have created sustainable long-term value.”
[E]ven those who support the existing tax policy say it was opportunistic for executives to avail themselves of big increases in stock options — which are supposed to be a performance-based reward — when a marketwide collapse meant that most companies’ stock price seemed destined to go up.
The increases in the value of options granted during the financial crisis would not just cost the Treasury. Shareholder advocates and corporate governance experts say they come at the expense of other investors, too, whose stake in the company is diluted.
Well before the market downturn, hundreds of American corporations reduced their tax bills by billions of dollars a year through their shrewd use of stock options. A decade ago, companies like Cisco and Microsoft were widely criticized because their stock options created such big deductions that, in some years, they paid no federal taxes at all.
And here is a video of a lion who cannot figure out why people are not frantically fleeing his frightful roar:
It's humiliating, is what it is.