Employee Stock Options

Question 1

What is an Employee Stock Option?

Answer 1

The company grants their employee the option to purchase stock at a designated price.

Question 2

What is an “in the money option”?

Answer 2

When you have the option to buy at $20, everyone else has to buy at a higher price.

Question 3

When is a NON-QUALIFIED option taxable?

Answer 3

When the employee is awarded the stock., as long as the value is readily ascertainable. Goes on W-2.

Otherwise, tax when exercised.

Question 4

When is a QUALIFIED option taxable?

Question 5

If employee is taxed on grant date, what happens on exercise date?

Answer 5

This is not a taxable event. Only taxed once.

Question 6

How do you calculate basis in employee stock option that was taxed at grant date, exercised later?

Answer 6

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.

Question 7

How to calculate TOTAL GAIN for stock options?

Answer 7

Grant date = ordinary income
Exercise date = capital gain

Add the 2 for total gain.

Question 8

What determines if an ESOP is taxable at the date of grant?

Answer 8

The exam will tell you if it is qualified (NON-taxable) or non-qualified (taxable).

Question 9

If the stock option has no readily ascertainable value, how do we calculate the ordinary income vs. capital gain on exercise date?

Answer 9

Ordinary income =
Difference between the FMV of stock less Amount Paid

Basis in the stock = Actual Amount Paid

Holding pd = exercise date

Question 10

On stock options not taxed until exercise date, how do we calculate basis?

Answer 10

Amount paid + Amount already taxed

Question 11

What happens if options expire as worthless that had been taxed at grant date?

Answer 11

Can take a capital loss in the year that the options expire worthless for the amount that was originally taxed.

Question 12

How is tax handled for qualified stock options?

Answer 12

NO tax on grant date or exercise date.

Question 13

What is an ISO (Incentive Stock Option)?

Answer 13

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.

Question 14

For an ISO, the option price cannot be less than what on the date of grant?

Answer 14

For an ISO, the option price cannot be less than the FMV of the stock on the date of grant.

Question 15

For an ISO, the options must be exercisable within ___ years of the date of grant?

Answer 15

10 years

Question 16

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.

Answer 16

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.

Question 17

What is a Qualified Equity Grant?

Answer 17

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.

Question 18

For non-qualified options, how much income is recognized at exercise date if the options had a RAV at grant date?

Answer 18

$0.

Question 19

why are qualified options preferable?

Answer 19

Because no income is recognized at grant or exercise dates.

Question 20

Are Qualified Equity Grants for private or public companies?

Answer 20

PRIVATE only

Question 21

For a qualified plan, how much income is recognized in the year of granting the option?

Answer 21

$0