# ASC 718-740-05: Compensation—Stock Compensation — Income Taxes — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/718/740/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:06:25.794Z to 2026-09-10T01:06:25.794Z Record version: sha256:70d4a1636ed8ca9342f4fcabde04ac3637e39d0fbc923b7e9cf3d4353d1c0b64 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 718-740-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/718/740/#05-overview-and-background) SEC content: no ##### [718-740-05-1](https://asc.understandingaccounting.org/asc/718/740/#718-740-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:06:25.794Z to 2026-09-10T01:06:25.794Z Record version: sha256:9cb3572075396507812824cb9ee62372e3062686acaf06af2f7e090f4c7576dc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Topic 740 addresses the majority of tax accounting issues and differences between the financial reporting (or book) basis and tax basis of assets and liabilities (basis differences). ##### [718-740-05-2](https://asc.understandingaccounting.org/asc/718/740/#718-740-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:06:25.794Z to 2026-09-10T01:06:25.794Z Record version: sha256:9fb8ba7a32cfc2cdc6f44ab159877c7a41f06bf7d0fb4e2f22103a08eb8c3800 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic addresses the accounting for current and deferred [income taxes](https://asc.understandingaccounting.org/glossary/i/#income-taxes "Domestic and foreign federal (national), state, and local (including franchise) taxes based on income.") that results from [share-based payment arrangements](https://asc.understandingaccounting.org/glossary/s/#share-based-payment-arrangements "An arrangement under which either of the following conditions is met: One or more suppliers of goods or services (including employees) receive awards of equity shares, equity share options, or other equity instruments. The entity incurs liabilities to suppliers that meet either of the following conditions: The amounts are based, at least in part, on the price of the entity's shares or other equity instruments. (The phrase at least in part is used because an award may be indexed to both the price of the entity's shares and something other than either the price of the entity's shares or a market, performance, or service condition.) The awards require or may require settlement by issuance of the entity's shares. The term shares includes various forms of ownership interest that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. Equity shares refers only to shares that are accounted for as equity. Also called share-based compensation arrangements."), including [employee stock ownership plans](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan."). ##### [718-740-05-3](https://asc.understandingaccounting.org/asc/718/740/#718-740-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:06:25.794Z to 2026-09-10T01:06:25.794Z Record version: sha256:3df04e3e9d84ccc49f49c2120537b2a4ba136bdb4b7364e7b0618a71784248a2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic specifically addresses the accounting requirements that apply to the following: 1. a The determination of the basis differences which result from tax deductions arising in different amounts and in different periods from compensation cost recognized in financial statements 2. b The recognition of tax benefits when tax deductions differ from recognized compensation cost 3. c The presentation required for income tax benefits from share-based payment arrangements. ##### [718-740-05-4](https://asc.understandingaccounting.org/asc/718/740/#718-740-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:06:25.794Z to 2026-09-10T01:06:25.794Z Record version: sha256:b93928680fad26251913a982b5d425ca050ab1af85d5d2143fac0e14e2401f00 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Income tax regulations specify allowable tax deductions for instruments issued under share-based payment arrangements in determining an entity's income tax liability. For example, under tax law, allowable tax deductions may be measured as the [intrinsic value](https://asc.understandingaccounting.org/glossary/i/#intrinsic-value "The amount by which the fair value of the underlying stock exceeds the exercise price of an option. For example, an option with an exercise price of $20 on a stock whose current market price is $25 has an intrinsic value of $5. (A nonvested share may be described as an option on that share with an exercise price of zero. Thus, the fair value of a share is the same as the intrinsic value of such an option on that share.)") of an instrument on a specified date. The [time value](https://asc.understandingaccounting.org/glossary/t/#time-value "The portion of the fair value of an option that exceeds its intrinsic value. For example, a call option with an exercise price of $20 on a stock whose current market price is $25 has intrinsic value of $5. If the fair value of that option is $7, the time value of the option is $2 ($7 - $5).") component, if any, of the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.") of an instrument generally may not be tax deductible. Therefore, tax deductions may arise in different amounts and in different periods from compensation cost recognized in financial statements. Similarly, the amount of expense reported for an employee stock ownership plan during a period may differ from the amount of the related income tax deduction prescribed by income tax rules and regulations.