Employee Stock Options Flashcards
What is an Employee Stock Option?
The company grants their employee the option to purchase stock at a designated price.
What is an “in the money option”?
When you have the option to buy at $20, everyone else has to buy at a higher price.
When is a NON-QUALIFIED option taxable?
When the employee is awarded the stock., as long as the value is readily ascertainable. Goes on W-2.
Otherwise, tax when exercised.
When is a QUALIFIED option taxable?
If employee is taxed on grant date, what happens on exercise date?
This is not a taxable event. Only taxed once.
How do you calculate basis in employee stock option that was taxed at grant date, exercised later?
You add the amount already taxed at grant date to what was paid for the stock when exercised. This becomes the basis in the stock. That way it is not taxed twice.
How to calculate TOTAL GAIN for stock options?
Grant date = ordinary income
Exercise date = capital gain
Add the 2 for total gain.
What determines if an ESOP is taxable at the date of grant?
The exam will tell you if it is qualified (NON-taxable) or non-qualified (taxable).
If the stock option has no readily ascertainable value, how do we calculate the ordinary income vs. capital gain on exercise date?
Ordinary income =
Difference between the FMV of stock less Amount Paid
Basis in the stock = Actual Amount Paid
Holding pd = exercise date
On stock options not taxed until exercise date, how do we calculate basis?
Amount paid + Amount already taxed
What happens if options expire as worthless that had been taxed at grant date?
Can take a capital loss in the year that the options expire worthless for the amount that was originally taxed.
How is tax handled for qualified stock options?
NO tax on grant date or exercise date.
What is an ISO (Incentive Stock Option)?
An ISO is usually granted to a key employee and is a right to purchase the stock at a discount. The employee may not own more than 10% of the combined voting power of the corp, parent, or sub as of the date of grant.
For an ISO, the option price cannot be less than what on the date of grant?
For an ISO, the option price cannot be less than the FMV of the stock on the date of grant.
For an ISO, the options must be exercisable within ___ years of the date of grant?
10 years
For an ISO, the stock must be held for at least ___ years after the grant date and at least __ year after the exercise date. Then, the employee must remain with the company from grant date until at least ___ months before the exercise date.
For an ISO, the stock must be held for at least 2 years after the grant date and at least 1 year after the exercise date. Then, the employee must remain with the company from grant date until at least 3 months before the exercise date TO QUALIFY.
What is a Qualified Equity Grant?
Company is not publicly traded. You can now elect to defer the recognition of income that you acquired for up to 5 years. Election must be made within 30 days of grant date. Deferral does not apply to FICA taxes.
For non-qualified options, how much income is recognized at exercise date if the options had a RAV at grant date?
$0.
why are qualified options preferable?
Because no income is recognized at grant or exercise dates.
Are Qualified Equity Grants for private or public companies?
PRIVATE only
For a qualified plan, how much income is recognized in the year of granting the option?
$0
