Entities may include a “clawback” provision in stock-based compensation awards.

Clawback features may also require forfeiture of an award, or a portion of an award, if there is a termination for cause or as required by the Sarbanes-Oxley Act. In addition, the Dodd-Frank Act requires stock exchanges to put rules in place requiring entities listed on the exchange to adopt certain clawback provisions in their incentive compensation plans, including stock compensation, for certain current and former executive officers. The Dodd-Frank Act and financial statement accounting considerations relating to clawback provisions are discussed in more detail in SC 10.2.4.

The income tax accounting for the clawback of a stock-based compensation award depends on the status of the award at the time of the clawback and whether the entity has previously taken the tax benefit from the stock-based compensation award. If the clawback occurs prior to the exercise of a stock option (or the vesting of restricted stock for tax purposes) and no tax deduction has been taken for the clawed-back awards, the related deferred tax asset would be reversed through income tax expense. If an entity has taken deductions for a stock-based compensation award that is being clawed-back, the tax effect of the taxable income resulting from the clawback (i.e., reversal of the tax deduction for the forfeited compensation) would be included in the income tax provision for the period.