An employer obtains a tax deduction at the same time and to the extent that ordinary income is recognized by the employee who receives nonqualified stock options.

Question

Quizplus · Accepted Answer

When an employee exercises nonqualified stock options, they recognize ordinary income based on the difference between the fair market value of the stock at exercise and the exercise price. The employer can then take a tax deduction for the same amount as ordinary income recognized by the employee. This is known as a "corporate tax deduction for compensation expense."

An Employer Obtains a Tax Deduction at the Same Time