Question: Hi. I have questions regarding this problem. I provided the answer to the question but I have a hard time understanding why the book-tax difference

Hi. I have questions regarding this problem. I provided the answer to the question but I have a hard time understanding why the book-tax difference is temporary and unfavorable? Can you please explain how to arrive at the correct solution? I would appreciate it.

Problem:

On January 1, 2020, PCC granted 20,000 NQOs with an estimated $10 value per option ($200,000 total value). Each option entitled the owner to purchase one share of PCC stock for $10 a share (the per-share price of PCC stock on January 1, 2020, when the options were granted). The options vested at the end of the day on December 31, 2020 (employees could not exercise options in 2020). Assume no options were exercised in either 2020 or 2021.

What is PCCs booktax difference associated with the nonqualified options in 2020? In 2021? Is each difference favorable or unfavorable? Is it permanent or temporary?

Answer: $100,000 unfavorable, temporary booktax difference in 2020 and again in 2021. PCC reports $100,000 of compensation expense for book purposes in 2020, $0 for tax purposes (the options were not exercised), and another $100,000 of compensation expense for book purposes in 2021 and $0 for tax.

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