A nonqualified stock option will create a permanent book-tax difference in the year it is exercised if the bargain element is different from the estimated value of the option for financial accounting purposes when it was issued.

Question

Quizplus · Accepted Answer

Nonqualified stock options create a book-tax difference in the year they are exercised if the bargain element (difference between the exercise price and fair market value of the stock) is different from the estimated value of the option for financial accounting purposes at issuance. This creates a permanent difference because it affects both book and tax income in different ways.

A Nonqualified Stock Option Will Create a Permanent Book-Tax Difference