Tesla will lose more than $100 billion if the court bans Musk from paying a huge bonus for his work in 2018

Tesla has no plans to back down from its decision to give CEO Elon Musk the largest package of stock options in history for his 2018 performance – worth $56 billion at the time of the original decision and more than $129 billion at the current share price. However, if the court’s ban on this decision fails to appeal, it could be costly for the company and its head: potential tax and accounting fees could exceed $100 billion.

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Delaware Judge Kathaleen McCormick recently rejected the electric car maker’s second attempt to give Musk his largest compensation package in history. Although shareholders overwhelmingly voted to re-approve the payout, a previous court decision in 2018 to block the deal remained in effect.

The judge’s position left Tesla’s board of directors with a dilemma: file an appeal with an unclear result in the Delaware Supreme Court or grant its CEO a new package of options. If the new package is issued under the same terms, it could trigger a corporate accounting charge of more than $50 billion and additionally impose a punitive tax rate of up to 57 percent on the shares transferred to Musk. Total losses will amount to more than $100 billion.

In April, Tesla warned shareholders that reissuing an option to Musk for 304 million shares would result in a tax bill of more than $25 billion because the company’s valuation was significantly higher than in 2018. But that calculation was based on a stock price of $175 on April 1, when Tesla’s market capitalization was $558 billion. Since then, the stock has more than doubled to $425, increasing Tesla’s capitalization to $1.3 trillion, so accounting expenses will also rise to $50 billion .

If Tesla files and wins an appeal within 30 days of Dec. 2, Musk will pay the standard 37% federal tax rate, but only after he exercises his 2018 option, which he doesn’t have to do until 2028. If the Delaware Supreme Court declines to overturn the original decision and the board decides to issue a new plan under similar terms, potential tax and accounting fees could total more than $100 billion.

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The fact is that Musk’s options, canceled by Judge McCormick, no longer exist from a tax point of view. Therefore, attempting to enter into a new transaction may violate Internal Revenue Code Section 409A, which triggers immediate taxation of the full value of deferred compensation on the date it is granted, long before the deferred compensation is taxed under normal rules. 409A was introduced in 2005 after Enron executives cashed in pledged shares they had received as part of their compensation plans before the company went bankrupt.

Musk will have to pay an immediate 57 percent income tax on the difference between the exercise price and the current stock price, regardless of whether he decides to exercise the options or not. At the current stock price of $425 and the $23.34 strike price set in 2018, the difference would be $122 billion, meaning a tax bill of almost $70 billion. Musk can only avoid this outcome by successfully appealing Judge McCormick’s decision.

The board of directors has another way to help Musk avoid an additional 20 percent tax, but it will still cost the company and its head dearly. Musk could receive 304 million Tesla shares, worth $129 billion at current prices, which would be subject to the standard rate of 37 percent, which would be about $48 billion.

In any case, a large-scale sale by Musk of the received shares to cover the tax levy could lead to a drop in the stock price on the stock exchange, and the company would still have to incur accounting costs. And if option negotiations begin again, Musk may not agree to the five-year post-exercise lock-up period during which he cannot sell shares, which was one of the terms of the 2018 agreement.

Musk is now the richest person in the world, with a net worth of more than $400 billion. In early 2022, in response to a report of an $11 billion tax debt, he said that he had “paid the most taxes ever for an individual.”