Consistent treatment of stock options by corporations

(a)

Consistent treatment for wage deduction

(1)

In general

Section 83(h) of the Internal Revenue Code of 1986 (relating to deduction of employer) is amended— (A)by striking In the case of and inserting:

(1)

In general

In the case of

, and

(B)by adding at the end the following new paragraph:

(2)

Stock options

In the case of property transferred to a person in connection with the exercise of a stock option, any deduction by the employer related to such stock option shall be allowed only under section 162(q) and paragraph (1) shall not apply.

(2)

Treatment of compensation paid with stock options

Section 162 of such Code (relating to trade or business expenses) is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

(q)

Treatment of compensation paid with stock options

(1)

In general

In the case of compensation for personal services that is paid with stock options, the deduction under subsection (a)(1) shall not exceed the amount the taxpayer has treated as an expense with respect to such stock options for the purpose of ascertaining income, profit, or loss in a report or statement to shareholders, partners, or other proprietors (or to beneficiaries), and shall be allowed in the same period that the accounting expense is recognized. (2)

Special rules for controlled groups

The Secretary shall prescribe rules for the application of paragraph (1) in cases where the stock option is granted by a parent or subsidiary corporation (within the meaning of section 424) of the employer corporation.

(b)

Consistent treatment for research tax credit

Section 41(b)(2)(D) of the Internal Revenue Code of 1986 (defining wages for purposes of credit for increasing research expenses) is amended by inserting at the end the following new clause:

(iv)

Special rule for stock options

The amount which may be treated as wages for any taxable year in connection with the issuance of a stock option shall not exceed the amount allowed for such taxable year as a compensation deduction under section 162(q) with respect to such stock option.

(c)

Application of amendments

The amendments made by this section shall apply to stock options exercised after the date of the enactment of this Act, except that— (1)such amendments shall not apply to stock options that were granted before such date and that vested in taxable periods beginning on or before June 15, 2005, (2)for stock options that were granted before such date of enactment and vested during taxable periods beginning after June 15, 2005, and ending before such date of enactment, a deduction under section 162(q) of the Internal Revenue Code of 1986 (as added by subsection (a)(2)) shall be allowed in the first taxable period of the taxpayer that ends after such date of enactment, (3)for public entities reporting as small business issuers and for non-public entities required to file public reports of financial condition, paragraphs (1) and (2) shall be applied by substituting December 15, 2005 for June 15, 2005, and (4)no deduction shall be allowed under section 83(h) or section 162(q) of such Code with respect to any stock option the vesting date of which is changed to accelerate the time at which the option may be exercised in order to avoid the applicability of such amendments.