Option tax loophole is targeted

A key senator said Tuesday that he wanted to change a quirk in the tax law that has allowed companies to claim tax deductions for stock options that are billions of dollars more than the option expenses on the firms’ books.

The discrepancy, which reflects different rules for accounting and taxation, came to $43 billion from December 2004 to June 2005, according to the Senate Permanent Subcommittee on Investigations.

Sen. Carl Levin (D-Mich.), the subcommittee chairman, said he would back legislation to close the gap, which he said acted as an incentive for companies to grant options, “fueling the growing chasm between executive pay and average worker pay.”

Stock options provide the right to buy a company’s shares during a specified period, usually at the market price the day they were granted.

Under accounting rules, companies must report as an expense on their books the value of stock options they granted to employees. But under the U.S. Tax Code, companies can’t claim a deduction when the expense is reported. They get the write-off only when employees exercise the options -- and the deduction equals the gains realized on the options by the employees.

As a result, if a company’s stock price rises sharply after the options are granted, the tax deduction will be much larger than the accounting expense recorded on the grant date. But if the stock price rises little or falls, the deduction may be smaller than the accounting expense, or there may be no deduction at all.

The healthy stock market in recent years has made higher tax deductions more likely.

KB Home, Occidental Petroleum Corp., Safeway Inc. and Apple Inc. were among companies whose deductions for options were much bigger than the option expenses on their books.

Representatives of KB and Safeway told the panel that their companies had no opinion on whether the law should be changed.

jonathan.peterson@ latimes.com