2.4 - Employee Stock Options

Question 1

What are the two types of employee stock options?

Answer 1

Non qualified options
Qualified options

Question 2

How are non qualified stock options taxed?

Answer 2

Usually taxed when exercised
But if readily ascertainable value at time of grant, taxed when granted

Question 3

How does the nonrefundble stock option have a readily ascertainable value?

Answer 3

If it is traded on an established market
OR
It is transferable, exercisable immediately in full when granted, has no conditions or restrictions, the fair value is readily ascertainable

Question 4

What is the employee’s taxation for a a non qualified option with readily ascertainable value?

Answer 4

Employee recognizes ordinary income in that amount in the year granted (if costs, subtract out)
No taxation on the date of exercise
Any future sale of stock results in capital gain or loss
If options lapse, there is a capital loss based on the value of options previously taxed

Question 5

What is the employee’s taxation for a a non qualified option with not readily ascertainable value?

Answer 5

On the date of exercise, employee recognizes ordinary income equal to the difference in the FMV of the stock and the stock option price exercised.
If the option lapses, the employee can deduct a capital los equal to the price, if any, that the employee paid

Question 6

What is the employer’s taxation for a a non qualified option?

Answer 6

The employer may deduct or expense the FMV of the stock option as a business expense in the same year the employee report income

Question 7

What are the two types of qualified stock options?

Answer 7

Incentive stock options (ISO)
Employee stock purchase plans (ESPP)

Question 8

This stock option is granted to a key employee and is a right to purchase the stock at a discount.

Answer 8

Incentive stock options (ISO)

Question 9

What are the requirements for an ISO?

Answer 9

1. Must be approved by the shareholders
2. Granted within 10 year of when the plan was adopted or approved (Earlier of the two dates)
3. Exercise price may not be less than the FMV
4. Employee may not own more than 10% of combined voting power
5. Stock must be held at least 2 years after the grant date & 1 year after the exercise date
6. Employee must remain employee until 3 months before the option is exercised

Question 10

What is the employee and employer taxation for incentive stock options (ISO)?

Answer 10

Employee - not taxable when granted or exercised. Taxable as a capital gain/loss when sold
Employer - no tax deduction

Question 11

This stock option is granted o employees to purchase stock in the corporation.

Answer 11

Employee stock purchase plan (ESPP)

Question 12

What are the requirements for an ESPP?

Answer 12

Plan must be written and approved by shareholders
Cannot grant options to any employee who has 5% or more combined voting power
Must include all full time employees
Exercise price may not be less than the lesser of 85% of the FMV of the stock when granted or exercised
Cannot be exercised more than 27 months after the grant date
No employee can acquire the right to purchase more than $25,000 of stock per year
The stock must be held at least 2 years after the grant date and 1 year after the exercise date
Employee must remain an employee of the corporation until 3 months before the option is exercised

Question 13

What is the employee and employer taxation for employee stock purchase planes (ESPP)?

Answer 13

Employee - not taxable income/compensation when granted or exercised. Capital gain/loss when sold
Employer - no tax deduction