Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in total). The options vest over two years-half in 2017 (the year of issue) and half in 2018. One thousand options are exercised in 2018 with a bargain element on each option of $6. What is the 2018 book-tax difference associated with the stock options?

Question

Quizplus · Accepted Answer

The book-tax difference is the difference between the book expense and tax expense related to the stock option plan. In this case, the book expense is the fair value of the options granted, which is $40,000, spread over the vesting period of 2 years, resulting in $20,000 of expense per year.

For tax purposes, the company can take a deduction for the amount of the bargain element on the options exercised, which is $6 per option in this case, resulting in a total tax deduction of $6,000 (1,000 options x $6 bargain element).

Therefore, the book expense of $20,000 exceeds the tax deduction of $6,000, resulting in a $14,000 unfavorable book-tax difference.