Midterm Flashcards
What amount and when do the employees that receives non-qualified options recognize ordinary income?
On the date when they exercise the options
(FMV of Stock on Exercise Date - Strike Price)
What happens if the employee sells the non-qualified stock options after they have been exercised?
They recognize a capital gain in the amount of:
(FMV of stock - FMV of stock on exercise date)
When does a company recognize expense for non-qualified options for book purposes?
Over the vesting period. (Total Initial Grant Date Fair Value/Vesting period) = compensation expense each period
What is the book tax difference created by non-qualified options?
Compensation expense is recognized over the vesting period for book purposes. For tax expense compensation expense is only recognized when the employee exercises the options. This creates a unfavorable timing difference.
How does an employee that receives an incentive stock option treat it for tax purposes?
They recognize income on the difference between the sales price and the purchase price at due date.
How does an employer treat an incentive stock option for book purposes?
Book expense for the option is recognized on the vesting date
How does an employer treat an incentive stock option for tax purposes?
There is no deduction ever for ISOs for tax purposes.
What is the timing difference created by incentive stock options (ISOs)?
Unfavorable, permanent difference because employers can recognize expense for book purposes but not for tax purposes. This means that taxable income is increased permanently.
What is Unicap (Section 263A)
Additional cost are capitalized for tax purposes when compared with absorption costing used by GAAP.
What does Unicap cause?
Since more expenses are capitalized for tax purposes this increase taxable income, creating an unfavorable timing difference.
This is a DTA because taxable income will be lower in the future when the inventory is sold
When are entities consolidated for tax purposes?
When a parent company owns greater than 80% of a sub.
When does a company recognize taxable income for unconsolidated entities?
For tax purposes, an entity only includes income when they receive a dividend from the equity investment
What is the book-tax difference for equity investments?
There is a favorable timing difference because for book purposes an entity includes the % of income.
The dividend received is only taxable amount
Eventually this difference will reverse
How to calculate the net operating loss that can be deducted?
80% * Taxable income = Amount that can be deducted
What is the tax rule for capital losses?
Capital losses can only be deducted when there is a capital gain that capital losses can offset.
This usually creates an unfavorable timing difference.
