Leverage is a key concept in investing, and one that has special application to stock options. If you’ve received options as part of your compensation, you’ll want to understand how leverage affects your profit. (more…)
Archive for the ‘Equity Compensation’ Category
Option Leverage
Tuesday, September 6th, 2011Senators Take Swipe at Stock Options
Wednesday, July 20th, 2011Senators Levin (D. Mich) and Brown (D. Ohio) have introduced the Ending Excessive Corporate Deductions for Stock Options Act, legislation that would limit the amount a corporation can deduct in connection with the exercise of compensatory stock options to the amount shown as an expense for the options in its financial statements. Similar proposals have been made in the past without garnering wide support.
Comment: Although it seems superficially logical that the tax deduction should not exceed the accounting expense, these figures differ because their purposes differ. The accounting expense relates to the company’s cost of providing this benefit, which in turn is based on the value of the option when granted. The tax deduction relates to the value of the benefit received by (and taxed to) the option holder, which is based on the bargain element of the option when exercised. A mismatch between these numbers is a normal consequence of ups and downs in stock prices and does not indicate the company has understated its accounting expense or claimed an excessive deduction.
Participating in a Deferred Compensation Plan
Wednesday, October 13th, 2010Someone asked on our message board about whether it makes sense to participate in a deferred compensation plan, and we decided to post a response here so it might be seen by more visitors. There’s more to these plans than meets the eye: the true nature of the tax benefit is far from obvious — and the same is true of the plan’s risk. (more…)
Changing Tax Rates Affect ISO Strategy — Part II
Tuesday, June 8th, 2010In a previous post we explain why, for years prior to 2010, it was potentially advantageous for individuals holding incentive stock options with large built-in profits to adopt a strategy under which they sell 65% of the shares immediately after exercising the option and hold 35% of the shares long enough to avoid a disqualifying disposition. In this post we explain how the “35% solution” changes for options exercised in 2010, and changes again for options exercised in 2011. (more…)
Changing Tax Rates Affect ISO Strategy — Part I
Friday, June 4th, 2010Strategies for incentive stock options are complicated by the need to factor in the effect of the alternative minimum tax (AMT). In my writings on managing stock options — Consider Your Options, a book for option holders, and Equity Compensation Strategies, a text for professional advisors — I explain why the optimal approach from a tax perspective for people who have very large profits built into their ISOs is to sell 65% of the shares immediately after exercise of the option and hold 35% long enough to convert the profit on those shares to long-term capital gain. The “35% solution” changes when tax rates change. This is the first of two articles on how these changes affect ISO strategy for options exercised this year, given that shares not sold immediately will be taxed at next year’s capital gains rates, and for options exercised in later years, when both regular tax rates and capital gains rates will be higher.
Finanacial Advisor magazine published an article quoting us on this subject and referring to this series of articles. (more…)
