Costco Wholesale (COST)

Impact of Accounting and Tax Considerations

The Committee examined the accounting cost associated with equity compensation in light of the impact of section 162(m) of the Internal Revenue Code, which generally prohibits any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the named executive officers, subject to certain exceptions for performance-based compensation. RSUs granted to our named executive officers are intended to satisfy the performance-based exception.

Impact of Accounting and Tax Considerations

The Committee examined the accounting cost associated with equity compensation in light of the impact of section 162(m) of the Internal Revenue Code, which generally prohibits any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the named executive officers, subject to certain

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exceptions for performance-based compensation. RSUs and cash bonuses granted to our named executive officers are intended to satisfy the performance-based exception and be deductible.

Another provision of the Internal Revenue Code, section 409A, affects the manner by which deferred compensation opportunities are offered to our named executive officers. Section 409A requires that “nonqualified deferred compensation” be structured in a manner that limits employees’ abilities to accelerate or further defer compensation under certain circumstances. In connection with the remediation program described under equity compensation programs above, options held by all U.S. employees that were not vested as of January 1, 2005, where a revised measurement date resulted in a higher market price, were increased to that higher market price. Messrs. Brotman and Sinegal were not affected by this program. All other executive offers were affected, except that Messrs. DiCerchio and Galanti did not participate in cash payments made to other employees to offset increases in exercise prices.