Kevin Williamson in the NRO Corner is upset about part of the Senate tax bill. The Senate GOP is planning to tax stock options at the at the date of vesting. Stock options is shorthand for a variety of equity instruments that are used as compensation. What is not clear is how exactly the employee’s income would be measured in the proposed bill.
Sidebar: We account (recognize the expense for financial reporting purposes) by recognizing the fair value as the employee earns compensation. Earning might coincide with vesting. We don’t think that the Senate intends to use fair value measurement but we are not entirely sure. Because financial accounting and tax accounting have different goals they are often different. End Sidebar.
You can award the options at a lower price than the current price of the stock: If you give the employee the option to pay $90 a share for 1,000 shares of stock currently priced at $100 a share, then you have given that employee $10,000, notionally.
The relevant definition of notionally would seem to be:
The information problem is knowing what the bill actually says. We haven’t found anyone who cites the bill so we don’t know what it says. We agree with Kevin but we want to know how income is measured and what would happen to old options. Kevin reports and comments that:
The Senate estimates that the measure would produce an extra $13.4 billion in revenue over ten years, but that’s either moving forward revenue that eventually would be collected by taxing the options when the options are exercised or, worse, by taxing people on gains that aren’t actually realized—most startups fail, after all, but they may fail after employees’ shares are vested.
We agree that the Senate proposal is moving the revenue forward. It is probably creating less total revenue since the startups that succeed do so in a big way. Even an aging star like Apple has gone from 107 to 174 in the last year. That surely produced income for the Feds and the state of California this year.
We support Kevin’s position because it is consistent with most tax rules. You pay taxes on what you were paid in 2017 rather than what you earned. We need more data to make a stronger position. How is income measured under the Senate proposal? What would be the total take keeping the old rules? What would be the total take if we relaxed the rules as the House suggests? The tax bill is not going to be perfect but let’s try to limit the number of stupid things in the tax bill. We think Kevin has identified one of the stupid things but we need a variety of expertise to make a really compelling case.