Academic journal article Journal of Accountancy

Employee Options Count for Research Credit

Academic journal article Journal of Accountancy

Employee Options Count for Research Credit

Article excerpt

Certain Apple Computer employees were granted nonstatutory stock options. During 1982 and 1983, the employees exercised the options after Apple's stock price rose precipitously. Apple included the spread-the stock's market price minus the employee's option price-as wages for employee withholding purposes and deducted the spread as wages on its corporate tax return.

Apple also treated the spreads as wages in calculating the credit for increasing research (currently, IRC section 41; at the time, section 44F). The IRS disallowed portions of the claimed credit ($12 million in 1982 and $21 million in 1983), claiming the spreads did not qualify as wages for that purpose.

Section 41(b)(2)(A) allows employers to include "any wages paid or incurred to an employee for qualified services" in calculating the credit. (The employees who exercised the options were performing qualified services.") "Wages" are defined [in section 41(b)(2)(D)] by reference to IRC section 3401, dealing with wage withholding. Under section 3401, the spreads clearly are wages. …

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