Washington has been fixated on the issue of boosting taxes on private equity and hedge fund managers by raising the tax rate on “carried interest”–the investment gains of fund managers–from 15% to 35%. But there are other revenue-raising tax measures that could potentially have far-reaching effects on the way that executives are compensated. At a hearing held in June, Sen. Carl Levin (D-Mich.), chairman of the permanent subcommittee on investigations, raised the issue of how stock options are expensed on a company’s financial statements versus their treatment on company tax returns. Financial Accounting Standard (FAS) 123R, enacted in 2005, requires companies to expense stock options on the grant date; the tax code, on the other hand, requires that companies deduct stock option expenses on the exercise date. Stock options, claims Levin, are the only compensation expense where companies are allowed to deduct much more on their tax returns than the expense shown on their books. In 2004 alone, the mismatched rules allowed corporations to take tax deductions $43 billion greater than the stock options expenses shown on their financial statements. Levin plans to introduce a bill that would bring stock option expensing and the tax deductions into alignment.
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