Employee Stock Options

Question 1

Two Types of Qualified Stock Options

Answer 1

Incentive Stock Options & ESPP

Question 2

ISO Requirements

Answer 2

Must be under a plan & approved by shareholders.

May not have more than 10% voting power

Exercise Price may not be less than the FMV of stock on grant date.

Once exercised, stock must be held at least two years after grant date and at leat one year after exercise date.

Employee must stay with company 90 days after ISO is granted before exercising

Question 3

Taxability of ISO

Answer 3

For employee, not taxable as compensation.

Capital gain/loss when sold.

For employer, no tax deduction

Question 4

ESPP Requirements

Answer 4

Plan written & approved by shareholders.

Employee cannot have more than 5% voting power.

Option exercise price may not be less than the lesser of 85% of the FMV of stock when granted or exercised.

Cannot be exercised more than 27 months after grant date.

Must be held 2 years after granted and 1 year after exercised.

Can’t purchase more than 25000.

Must stay with company 90 days after exercising

Question 5

Taxability of ESPP

Answer 5

For employee, not taxable as compensation.

Capital gain/loss when sold.

For employer, no tax deduction

Question 6

Nonqualified Stock Option characteristics

Answer 6

If the option has a readily ascertainable value when granted, it’s taxable at time of grant. If it doesn’t, then taxable when exercised

Question 7

When does an Employer take a deduction for an employee’s nonqualified stock option?

Answer 7

The same year the employee recogizes the option as income.