Introduction
Amazon recorded $2.6 billion of excess tax benefits from stock-based compensation in 2025, and $2.8 billion in 2024, according to its 2025 annual report on Form 10-K. In 2023, the same kind of awards produced a tax shortfall of $519 million. In 2024, the stock-based compensation line of Amazon's tax rate reconciliation cut its effective tax rate by 3.3 percentage points, to 13.5%. The swing came less from how many awards Amazon granted than from its share price when they vested: deductions for equity awards follow the market, while the expense in the books is fixed when the awards are granted.
Book Expense and Tax Deduction
In the books, an equity award is measured at its fair value on the grant date and expensed over the vesting period, as traced in stock-based compensation on the three statements. For awards that will be deductible, such as restricted stock units and non-qualified options, the company records a deferred tax asset as it recognizes the expense, equal to the expense times the tax rate. Incentive stock options are generally not deductible, so they create no deferred tax asset; if an employee later sells the shares early in a way that triggers a deduction, the tax benefit is recorded only when that sale happens.
For tax, the deduction arises when restricted stock vests, when restricted stock units settle (usually at vesting) or when an option is exercised, measured by the value the employee receives at that moment. If the share price has risen since the grant, the deduction exceeds the book expense; if it has fallen, the deduction falls short. Suppose a company grants restricted stock units worth $100 and pays tax at 21%:
| Line item | Share price rises | Share price falls |
|---|---|---|
| Book expense over vesting, at grant-date value | 100 | 100 |
| Deferred tax asset built up at 21% | 21 | 21 |
| Tax deduction at vesting, at value then | 150 | 60 |
| Tax saved at 21% | 31.5 | 12.6 |
| Excess tax benefit or (shortfall) in tax expense | 10.5 | (8.4) |
When the award vests, the deferred tax asset of 21 is reversed. The difference between the tax actually saved and that asset goes to income tax expense.
Since ASU 2016-09, the whole difference runs through income tax expense in the period the award vests or is exercised. Before then, excess benefits went to additional paid-in capital and shortfalls were offset against a pool of past excess benefits, as the text of ASU 2016-09 sets out. The change made stock compensation one of the main sources of volatility in reported tax rates.
- Excess tax benefit
The amount by which the tax deduction for a share award, measured at vesting or exercise, exceeds the cumulative book expense, multiplied by the tax rate. Under US GAAP it reduces income tax expense when the award settles; the opposite case, a deduction below the book expense, is a tax shortfall that increases tax expense.
Where the Effects Appear
The excess benefits and shortfalls are treated as discrete items in the quarter they arise, so they are not spread across the year through the estimated annual tax rate. Companies whose awards vest mostly in one quarter often show a noticeably lower tax rate in that quarter when the share price is high. In the rate reconciliation, they usually appear in a stock-based compensation line, which also captures compensation that is never deductible, such as pay above the Section 162(m) limit for senior executives.
On the cash flow statement, the tax saved is part of operating cash flow, with other income tax payments. And in diluted EPS, the treasury stock method no longer assumes that excess tax benefits fund share repurchases, a change made by the same update and covered in earnings per share: basic vs diluted.
For bankers, the effect cuts both ways. A company whose share price has climbed will report a lower effective rate and higher net income than its underlying business would suggest; one whose shares have fallen will report the opposite, along with deferred tax assets that may never be fully recovered. The expense side of the same awards is covered in stock-based compensation accounting.
