I just read that company’s CFO will be higher by the following amount for stock exercise. Tax savings on exercise= (Market price- strike) * tax rate How come employee exercising stock options leads to this tax saving?
When the employee exercises the stock options they (the employee) has to pay tax on the difference between the market price and the strike price. Because the employee pays this tax, the company gets a deduction on their books.
because it’s a loss for the company
I like what maratikus said better. It is a zero sum gain. So it is a gain to the employee (market price is higher than strike), but a loss to the company.
How does a company lose money when an employee exercises stock options? I believe it has to do with compensation expense not being deductible until the option is exercised by the employee (versus the expense being a write off at grant). A deferred tax something or other occurs at grant of the options and then realized when the option is exercised.
Understood very well. Thanks for all your replies
The company is losing money because they are issuing the stock at the exercise price, which is some price lower than the market price of the stock at it is exercised.
Yes…I guess forgone opportunity = loss. So is the tax benefit the amount of the loss McLeod as stated by someone else above? I understand it differently and as I stated previously. Maybe someone can clarify???
Compensation expense isn’t deductible when it is recognized, instead deferred tax asset (T*Comp Expense) is created. The tax benefit is deferred until the options are exercised, and the “loss” that is tax deductible = Market Price - X Price. The tax benefit is therefore T*(MV-X). Part of the tax benefit is already accounted for as D.T.A. Excess tax benefits go to additional Paid in Cap.