Saturday, December 14, 2019

ITEP and J. P. Morgan's employee stock options

Two days ago I commented on ITEP’s article How Congress Can Stop Corporations from Using Stock Options to Dodge Taxes. Table 1 in the article shows amounts of tax breaks in 2018 for 25 corporations, including J.P.Morgan Chase & Co., second highest with an amount of $1.1 billion. The article says, “Table 1 lists the 25 corporations disclosing the largest tax breaks from stock options in 2018. The tax break listed for each company is the tax decrease resulting from tax deductions it claimed for stock options in excess of the stock option expenses reported on its books.”

So ITEP describes the numbers as reductions in taxes, not the reduction in taxable income. The former is the latter times a tax rate. I looked for the $1.1 billion in J.P.Morgan Chase’s 2018 10-K. It’s on page 210. "Income tax benefits related to share-based incentive arrangements recognized in the Firm’s Consolidated statements of income for the years ended December 31, 2018, 2017 and 2016, were $1.1 billion, $1.0 billion and $916 million, respectively. The following table sets forth [ ] the actual income tax benefit related to tax deductions from the exercise of the stock options." The table shows $75 million for 2018. So it’s clear that $1.1 billion was the reduction in taxable income and $75 million was the reduction in tax. Why did ITEP claim a reduction in taxable income as a reduction in tax? $75 million would have put J.P.Morgan #25 or off the list. By the way, $75 million is only 6.8% of $1.1 billion, whereas the main corporate tax rate is 21%. I can’t reconcile the difference. Perhaps the $1.1 billion includes some incentive compensation other than nonqualified stock options. The 10-K refers to such plans (RSU and PSU).

Also relevant to my recent posts about employee stock options is the following on page 209 of the 10-K: “The Firm’s policy for issuing shares upon settlement of employee share-based incentive awards is to issue either new shares of common stock or treasury shares. During 2018, 2017 and 2016, the Firm settled all of its employee share-based awards by issuing treasury shares.” In other words, J.P.Morgan Chase used what I labeled Method 2 here, a method none of ITEP’s articles mention.

The tax break amount ITEP shows for Amazon (#1) matches its 10-K and is a reduction in tax. Ditto for Facebook (#5). I didn't find ITEP's number for Google (#4) in its 10-K. So there doesn't appear to be a systematic error.

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