Employee Stock Options

Question 1

A nonqualified option is taxed when…

Answer 1

granted if the option has a readily ascertainable value at the time of the grant (has a price in the stock market)

Question 2

Nonqualified stock option taxation to employee when its value is readily ascertainable

Answer 2

• taxable when granted
• employee reconginzes ordinary income in that amount in the year granted
• no taxation on the date of exercise
• basis of stock is exercise price plus any amount previously taxed on the grant date
• a future sale of stock could result in cap gain or loss
• holding period begins excerise date
• if allowed to lapse, capiral loss based on what they were previously taxed

Question 3

nonqualified stock option tax to employee when value is not readily ascertainable

Answer 3

• taxed at exersize
• date if exercise employee recogonizes ordinary income equal to “barrgain element” diff bw fmv of stock n stock option price exercised
• furture sale result in cap gain or loss
• option lapse, cap loss equal to the cost i any the employee paid for option, nothing else

Question 4

employer taxation of nonqualified stock option to employee

Answer 4

-deduct value of option as business expense in the same year the employee is required to recongize the option as ordinary income

Question 5

What are the two types of qualified stock options?

Answer 5

Incentive stock options and employee stock repurchase plans (ESPP)

Question 6

What is an incentive stock option

Answer 6

granted to a key employee and is a right to buy the stock at a discount

Question 7

What are the requirements for incentive stock option?

Answer 7

1) must b granted under a plan and approved by SH’s
2) granted within 10 years of the date plan was adopted/approved- must be exercisable within 10 years of grant date
3) exercise price cannot be less than FMV of stock at the date of the grant
4) employee cant own more than 10% combined voting power
5) once exercised, stock must be held at least 2 years after the grant date and at least one year after the exercise date
6) must remain an employee from date option is granted until three months before option is exercised

Question 8

Employee taxation for incentive stock option

Answer 8

• no taxation of the option as compensation
• any gain loss on subsequent sale is capital
• if option lapse, no deduction is available
• employee may exercise up to 100k of ISOs in a year. anything excersized exceeding that is treated as nonqualified option
• excess fmb of stock on exercise date less purchase price is a preeference item for AMT

Question 9

Can an employer deduct incentive stock options?

Answer 9

no

Question 10

Employee stock purchase plans requirements

Answer 10

-plan must b written and approved by SHs
-cannot be to an employe with 5% or more voting power
-plan must include all full time employees other than those highly compensated n less than two years employment
-exercise price may not be less than lesser of 85% of the FMV of stock when granted or exercised
cannot be exercised more than 27 months after grant date
-cant purchase more than 25k of stock per year
-stock must be held at least two years after grant date and at least one year after the exercise date
-must remain employee until 3 months before option is exercised