CH 16 - Equity-Based Compensation Plans Flashcards
What are the FOUR reasons for using equity-based compensation?
- align interests of executive and shareholder (aka employer)
- start-up companies cash is short, so this would be cheaper
- tax-advantage due to capital gains treatment
- the inclusion of performance can be tide to compensation
Incentive Stock Options price must be at least _______ of market value at grant.
100%
Employer grants Ellie right to purchase 500 shares of common stock at current market price ($20) any time over next 10 years. After 3 years, Ellie purchases all 500 shares. Price has risen to $60/share ($30,000).
- How much did Ellie pay for the stock and how much of it is ordinary income?
- What is the employer’s deduction?
- If Ellie sells in 2 years for $100 a share. What is the capital gain amount?
A) Ellie pays $10,000 for stock and has $20,000 of ordinary income.
B) Employer deduction is $20,000
C) Ellie sells in 2 years for $100 a share; she has $20,000 of long-term capital gain
What is a non-qualified stock option (NQSO)?
Option to purchase stock at specified price.
The employee has ordinary income at exercise and the employer receives deduction.
What is the tax treatment of an incentive stock option at the time of exercise? At the time of sale?
Exercise: NO deduction for employer just an AMT preference item.
Sale: Long-term capital gain treatment if the holding period is 2 years from grant and 1 year exercise.
Alex, receives an ISO for 1,000 shares of company stock. The exercise price of the options is $10. One year later, Alex exercises his ISOs and receives 1,000 shares of stock. Alex holds these shares for another 2 years and then sells them for $15 per share. What is the capital gain treatment?
At that time Alex has a long-term capital gain of $5,000 (1,000 × $5).
How many years of service is required for Employee Stock Purchase Plans (ESPP)?
2 years
Employee Stock Purchase Plans (ESPP) allows employees to purchase company stock a ____% discount. When?
15% at the beginning or end of period
Employee Stock Purchase Plans (ESPP) are generally sponsored by…
A) large public companies
B) small private companies
large public companies
When will an Employee Stock Purchase Plans (ESPP) get taxed?
Only at the sale of the stock, NOT when it’s exercised
If you hold your Employee Stock Purchase Plans (ESPP) shares for more than a year after the purchase date AND more than two years after the beginning of the offering period then (2 year/1 year),…
only the difference between price at grant and discounted price treated as ordinary income with the rest treated as capital gains, with no employer deduction.
Phantom stock is a payout bonus that is based on _______ at a FIXED maturity date.
stock appreciation (value of underlying stock)
How are the tax deductions handled in respect to phantom stock?
employEE ordinary income
employER receives deduction
How are restricted stocks different than phantom stock?
Restricted stocks are titled in the executive’s name.
Even through restricted stock is title in the executive’s name, when will the executive get taxed?
When risk of forfeiture lapses, unless there is a Sec. 83 election to become taxed at the time of grant.
