Assume that on January 1, year 1, XYZ Corporation issued 1,000 nonqualified stock options with an estimated value of $4 per option. Each option entitles the owner to purchase one share of XYZ stock for $14 a share (the per share price of XYZ stock on January 1, year 1, when the options were granted). The options vest 25 percent a year (on December 31) for four years (beginning with year 1). All 500 stock options that had vested to that point were exercised in year 3 when the XYZ stock was valued at $20 per share. No other options were exercised in year 3 or year 4.

Identify XYZ's year 1, 2, 3, and 4 tax deductions and booktax difference (identify as favorable or unfavorable and as permanent or temporary) associated with the stock options.