Tax Benefit from Employee Stock Plans When an employee exercises stock options, the employer gets to deduct the gain received by the employee against its corporate income. (Employee compensation is generally tax deductible.) Because the result is a lower tax bill, we need to add back the tax benefit to the already-taxed net income. Be wary of this line item—if it’s large relative to total operating cash flow and the company’s stock has been zooming upwards, you shouldn’t count on this cash being around in the future. When the shares sink, fewer employees will exercise their options, and the
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