What is Excess tax benefits (share-based payments)?
In short
When the tax deduction for a share-based award, based on its value at exercise or vesting, exceeds the compensation cost recognized, the excess tax benefit is recognized in income tax expense. Shortfalls also go to tax expense.
Key takeaways
- This makes the effective tax rate more volatile, especially when share prices move.
- Excess tax benefits are operating cash flows.
- The deferred tax asset is built up as compensation cost is recognized.
Where it's tested
BAR: Stock Compensation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
When employees exercise stock options, the company's tax deduction exceeds the compensation cost recognized for the awards. Where does the excess tax benefit go?