This chapter discusses the income tax accounting effects related to stock-based compensation and the reporting of those effects in an entity’s financial statements.

Under US tax law, the ultimate tax deduction for nonqualified stock options, restricted stock, restricted stock units, and stock appreciation rights will almost always differ from the amounts recognized for financial reporting because they generally result in a tax deduction when the taxable event occurs (e.g., upon exercise). Statutory options, including ISOs and ESPP purchases, ordinarily do not result in a tax deduction. The tax effects from these awards are not recorded unless a disqualifying disposition occurs.

This chapter also covers other income tax accounting topics related to modifications of awards, repurchases and clawbacks of awards, awards exchanged in a business combination, valuation allowances, interim reporting, and multinational entities.

Refer to PwC’s Stock-based compensation guide for further guidance on topics related to accounting for stock-based compensation under ASC 718, Compensation—Stock Compensation.