Ex Comp Tax

Question 1

What is a stock option?

Answer 1

Er gives ee the right to buy the stock at a certain number of shares of stock from you over a certain defined period and for a fixed price.

Gives ee an interest in the upside (potential appreciation in the shares of stock).

Question 2

What is a call option contract?

Answer 2

By giving ee right to buy stock form company at a fixed price, if the price of the stock appreciates over time, then the er can buy the stock at a lower fixed price, like 10 a share, and then sell stock later at a higher price like 15 a share, which gives ee change to pocket 5 appreciation

Question 3

What is a put option?

Answer 3

A financial contract that gives the buyer the right, but not the obligation, to sell an underlying asset, such as a stock, at a specified price (strike price) within a specific time period.

When you buy a put option, you are essentially betting that the price of the underlying asset will decrease in value before the option expires. If the price of the asset does indeed fall below the strike price, you can exercise the put option and sell the asset at the higher strike price, thereby making a profit.

Question 4

When is an nonqualified stock option (NQSO) taxed?

Answer 4

No tax upon grant; taxed when exercised.

Question 5

What is the advantage to ee for to getting a stock option from an er?

Answer 5

Er is giving ee a valuable right because it permits you to invest without having to have any capital tied up and giving you money on a non-recourse basis to buy that stock.

Question 6

When can an ee exercise their stock option?

Answer 6

When the stock option vests

Question 7

When does the holding period start for an NQSO?

Answer 7

At the time of exercise.

Question 8

What is the stock option’s basis at exercise?

Answer 8

FMV of stock at the time of exercise [formula: exercise price that ee pays + amount of compensation that ee is required to recognize]

Question 9

What is IRC 83 about? When is income generated?

Answer 9

Governs the taxation of property received in exchange for services, including stock options and restricted stock units (RSUs).

The value of the property received in exchange for services is generally includible in the recipient’s gross income in the year in which it is received, even if the property is subject to restrictions or the recipient does not have full control over it.

Question 10

What is IRC Section 409A?

Answer 10

It applies specifically to nonqualified deferred compensation plans, which are plans that allow employees to defer compensation to a future year. These plans are subject to strict rules regarding the timing of deferral elections, the timing of payments, and the taxation of deferred compensation.

In general, deferred compensation subject to Section 409A is includible in the recipient’s gross income at the time it is paid or made available, unless certain conditions are met.

Question 11

WHEN to make election to defer compensation?

Answer 11

Before beginning of tax year ee will earn the compensation

Question 12

What is the definition for deferred compensation?

Answer 12

Must be legally binding right to money that may not be payable within the same taxable year.

Question 13

What is the short term deferral exception?

Answer 13

A deferral of compensation is considered a “short-term deferral” if it is paid within 2 1/2 months after the end of the calendar year in which the employee has a legally binding right to the compensation.

They are exempt from the strict rules governing nonqualified deferred compensation plans.

For example, if an employee earns a bonus in December 2022 and the bonus is paid on or before March 15, 2023, the bonus would qualify as a short-term deferral and would not be subject to the strict rules governing nonqualified deferred compensation plans. However, if the bonus is paid after March 15, 2023, it would no longer qualify as a short-term deferral and would be subject to the rules of IRC Section 409A.

Question 14

what are the 6 basic events where deferred compensation can be paid?

Answer 14

1. Separation from service (employment ends)
2. The date the participant becomes disabled (executives’ 6-month rule doesn’t apply)
3. Death (executives’ 6-month rule doesn’t apply)
4. A specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation
5. A change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation (change of control)
6. The occurrence of an unforeseeable emergency

Question 15

Elective deferral: When can ee gets to elect for er’s deferred compensation

Answer 15

Ee’s election must be made BEFORE end of year BEFORE the year in which ee starts performing the services that give rise to the payment

Question 16

Mandatory deferral: When er makes the decision - when is the election made?

Answer 16

Er’s election made before the LATER OF: beginning of service year OR date legally binding right arises.

Question 17

The deferral election must set what regarding payments?

Answer 17

TIME and FORM of payment

But no decision needs to be made about MEDIUM of payment

Question 18

When can an ee elect as a new participant of a deferred compensation plan?

Answer 18

Ee gets 30 days into the year after the ee first becomes a participant to make deferral election

Question 19

For elective deferrals, when must ee elect after becoming a participant to make deferral election?

Answer 19

For elective deferrals, ee gets 30 days into the year after the ee first becomes a participant to make deferral election

Question 20

Must payment date be in plan documents?

Answer 20

Payment date must be in documents

Example: document needs to say the payment will be made within the short term deferral period

Question 21

If the parties NEVER said when money is going to be paid BUT the bonus IS PAID or MADE AVAILABLE to ee on or before March 15

Answer 21

Then it’s okay to determine that it qualifies as short-term deferral

Question 22

What is a payment construed as constructively received?

Answer 22

A payment is treated as constructively received if er gives you current, unrestricted right to take the money, then it’s as if er gave it to you even if you say you don’t want it

Question 23

A plan may permit a subsequent election to delay a payment or change the form of payment if?

Answer 23

1. Must make election one year in advance.
2. Amount is deferred for additional five year
3. The subsequent election or agreement to defer is not effective for at least 1 year

Question 24

When does a restricted stock vest?

Answer 24

Stock will be vested (and ee taxation and er deduction occurs) at EARLIER of…- Treas. Reg. § 1.83-3(b):
1. the property that has been transferred to the executive is no longer subject to a substantial risk of forfeiture, or
2. the property is transferable.