SC 3.3.3 describes the pre-tax accounting for the repurchase of an award, which may result in the recognition of additional compensation expense, modification-like accounting, or the settlement of an award.

From a tax perspective, the amount of the cash settlement is generally deductible by the employer to the extent the entity has not previously taken a tax deduction for the award. For example, a deduction would not have previously been taken by the employer for a nonqualified stock option that has not been exercised by the employee. The amount that is deductible may also be subject to the IRC Section 162(m) limitation for covered employees (TX 17.8). Generally, the entity is not entitled to an additional deduction for the cash settlement if it has previously taken a deduction on the award (e.g., a restricted stock award in which the employee made an IRC Section 83(b) election; see TX 17.5.1.1 for further discussion of IRC Section 83(b) elections).

When there is a repurchase of an award for cash, any remaining deferred tax asset related to the awards (in excess of the tax benefit resulting from the repurchase, if any) would be written off through income tax expense.