5 - Stock Compensation Plans Flashcards
Among the number of requirements that must be met before a plan can qualify as an ISO plan are
- (1) the term (duration) of an option cannot exceed _____ years;
- (2) the option price must equal or exceed _________ when the option was granted;
- (3) an employee cannot dispose of the stock within ___ years from the granting of the option or within ____ year(s) of the transfer of the stock to him or her (i.e., after exercise of the option);
- (4) the option must be ________ (except by will or inheritance at death); and
- (5) the maximum value of stock for which an employee can exercise ISOs for the first time in a calendar year generally cannot exceed $______ (valued as of the date of the grant).
- ten
- the value of the stock
- two / one
- nontransferable
- $100,000
The main tax advantage of ISOs is that there is no _______ levied at the grant or at the exercise of the option by the employee.
However, the bargain element upon exercise of an ISO (i.e., the difference between the fair market value of the stock at exercise and the option price) is an adjustment item for ___________ purposes. Aside from this issue, the employee is taxed only when he or she sells the stock purchased under the option plan, and then any gain realized is taxed as _______. It would be the difference between the option price (the income tax basis of the stock) and the stock’s fair market value on the date of sale.
- regular income tax
- individual alternative minimum tax (AMT)
- a capital gain
Applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions, under federal tax law. These tax benefits can significantly reduce the regular tax of some taxpayers with higher economic incomes. This sets a limit on the amount these benefits can be used to reduce total federal tax
alternative minimum tax (AMT)
What tax advantages does an employer realize from ISO plans?
None, they get NO deduction
____________ are option arrangements under which all full-time employees meeting certain eligibility requirements are allowed to buy stock in their employer corporation, usually at a discount.
Employee stock purchase plans
An employee stock purchase plan’s option price cannot be less than the lower of
- (1) 85% of the stock’s fair market value when the option is _____ or
- (2) 85% of the stock’s fair market value when the option is ____.
Many employers use these maximum discounts as the ______ under their plans. Employees who participate agree to have an estimated amount withheld from their pay to provide the funds with which to exercise their options at the end of an option period. Employee stock purchase plans are ________ in that they cannot favor _________.
granted
exercised
option (strike) prices
nondiscriminatory / highly paid executives
If plan requirements under Section 423 of the (IRC) are met, there is no ______ for participating employees at the grant or exercise of options under employee stock purchase plans. However, to get this favorable tax treatment, an employee cannot dispose of the stock within ___ years from grant of the option and within ___ years from its exercise. If such a disqualifying disposition were to occur, the employee would be taxed, as _________ in the year of disposition, on the difference between the fair market value of the stock and the option strike price when the option is exercised.
gross income
two
one
ordinary compensation income
Nonstatutory employee stock compensation plans are not governed by any special provisions of the IRC. Rather, these plans are interpreted under the provisions of two IRS sections related to income:
Section 61 and Section 83
Section 61 simply defines _______ for federal income tax purposes.
The more significant provision is Section 83 that deals with taxation of property transferred in connection with the ________. Section 83 in essence provides that the fair market value of property (less any amount paid for the property) transferred to a person for the performance of services shall be included in that person’s ______ in the first taxable year in which the person’s rights in the property become _______ or are not subject to a ________, whichever is applicable.
- gross income
- performance of services
- gross income
- transferable
- substantial risk of forfeiture
_______ provides that a person performing services (e.g., an employee) may elect within 30 days of a transfer to include the fair market value of the transferred property (less any amount paid for the property) in his or her gross income, even though the property is subject to a substantial risk of forfeiture or is not transferable and hence under this normally is not taxable at that point.
Section 83(b)
A person receiving property for the performance of services (e.g., an executive receiving restricted employer stock) might want to make a Section 83(b) election and be taxed on the current value of the stock; if the current value is relatively low, the person expects it to ____________, and he or she expects to remain with the employer at least through the _______.
rise significantly in the future
forfeiture period
NQSOs are stock options that do not meet the requirements for ISOs and so are taxed on the basis of the general principles under ________.
NQSOs can have terms decided upon by the parties and are not limited in the amount of stock subject to such options exercisable by an employee in any one year (as are ISOs). Hence, NQSOs can be considerably more _______ for employers and employees.
NQSOs are often granted with an option price equal to ________ of the stock on the date of grant and for option terms of around ____ years.
- Sections 61 and 83
- flexible
- 100% of the fair market value
- ten
tax treatment of NQSO plans for employees and the employer
There normally is no taxable event (gross income) at grant because the tax regulations view their value then as not being readily _______.
On the other hand, upon exercise of an option (and transfer of the stock to the employee), the employee will receive ordinary compensation income for regular federal income tax purposes equal to the difference between the fair market value of the stock at exercise and the option price (the bargain element). The employee’s income tax basis in the stock is its _______ at exercise. This is because the employee paid the option price to the employer (a cost basis) and included the remainder of the stock’s value (bargain element) in his or her gross income as compensation (basis under the tax benefit principle). Thus, an immediate sale of the stock by the employee (there are no two-year and one-year holding periods for NQSOs) will produce zero ________ or ______ since the amount realized would equal the adjusted basis for the stock.
As for the employer, the employer gets a ___________ for the amount of compensation income the employee realizes at exercise of the option.
- ascertainable
- fair market value
- capital gain or loss
- corporate income tax deduction
_______ are arrangements by which a corporation grants stock (or stock options) to an employee (or someone rendering services to the corporation), but ownership of the stock is subject to a substantial risk of forfeiture. they can be part of a general compensation program or a bonus plan.
Restricted stock plans
tax treatment of restricted stock plans for employees and the employer.
The general principles of _______ apply. That is, an employee receives _________ in the year the employee’s rights to the stock are first not subject to the substantial risk of forfeiture or are transferable. The gross income is measured by the fair market value of the stock at that time less any cost to the employee.
However, depending on the circumstances, ________ may be considered. A person receiving restricted stock must make a ________ regarding this election.
Section 83
ordinary compensation income
a Section 83(b) election
planning decision
