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This chapter discusses the income tax accounting effects related to stock-based compensation and the reporting of those effects in an entity’s financial statements. Unless otherwise noted, the discussion in this chapter addresses the income tax implications of stock-based compensation under US tax law. An understanding of how an entity’s tax deduction for stock-based compensation is measured in the US requires an understanding of the nature of the instrument or award that is being granted to the employee and whether the employee has made any elections with respect to the award.
This chapter gives an overview of an entity’s accounting for income taxes related to stock-based-compensation awards, including the following:
• nonqualified stock options
• statutory stock options, including incentive stock options (ISOs) and employee stock purchase plan (ESPP) purchases
• restricted stock and restricted stock units
• stock appreciation rights
Under US tax law, the ultimate tax deduction for nonqualified stock options, restricted stock, restricted stock units, and stock appreciation rights will almost always differ from the amounts recognized for financial reporting because they generally result in a tax deduction when the taxable event occurs (e.g., upon exercise). Statutory options, including ISOs and ESPP purchases, ordinarily do not result in a tax deduction. The tax effects from these awards are not recorded unless a disqualifying disposition occurs.
This chapter also covers other income tax accounting topics related to modifications of awards, repurchases and clawbacks of awards, awards exchanged in a business combination, valuation allowances, interim reporting, and multinational entities.
Refer to PwC’s accounting and financial reporting Guide to Accounting for Stock-based Compensation for further guidance on topics related to accounting for stock-based compensation under ASC 718, Compensation—Stock Compensation.
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