Ch 1: Employee Stock Options

Question 1

Describe the employee and employer taxation of nonqualified employee stock options.

Answer 1

1) Employee Taxation:

• A) If there is a readily ascertainable value, the employee recognizes ordinary income in that amount in the year granted.
• B) If there is no readily ascertainable value, the employee recognizes ordinary income based on the fair value of the stock purchased less any amount paid for the option on the exercise date.

2) Employer Taxation:
* A) The employer may deduct the value of the stock option as a business expense in the same year the employee recognizes ordinary income.

Question 2

Describe the employee and employer taxation of incentive stock options (ISOs)

Answer 2

1) Employee Taxation: A) Generally ISOs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.
2) Employer Taxation: A) Generally, employers do not receive a tax deduction for ISOs.

Question 3

Describe the employee and employee taxation of employee stock purchase plans (ESPPs).

Answer 3

1) Employee Taxation: A) Generally ESPPS are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.
2) Employer Taxation: A) Generally, employers do not receive a tax deduction for ESPPs.