Module 6 Flashcards
Options to purchase stock
- Nonqualified Options
2. Qualified Options
Nonqualified Options - Stock
Nonqualified Option is taxed when granted if the option has a readily ascertainable value at the time of the grant. If there is not an ascertainable value the it is taxed when exercise.
Readily Ascertainable Value on a Nonqualified Option - Stock
- The option is traded on an established market
if not,
- All these conditions must be met:
- The option is transferable
- The option is exercise immediately in full when it is
granted - There are no conditions or restrictions that would
have a significant effect on the value - The Fair value of the option privilege is readily
ascertainable
Employee Taxation on a Readily Ascertainable Value on a Nonqualified Option - Stock
- Employee recognizes ordinary income in the year granted. Income = value of the option - any cost to the employee
- Exercise of stock - No taxation. Basis = exercise price plus any amount previously taxed
- Sale of stock = Capital gain or loss
- Stock option lapse = Capital Loss
Employee Taxation Without a Readily Ascertainable Value on a Nonqualified Option - Stock
- Grant of stock - No taxation
- Exercise of stock - Employee recognizes ordinary income based on the FMV of the stock less amount paid
- Basis of Stock = Actual exercise price plus any ordinary income recognized
- Sale of Stock = Capital gain or loss
- Stock option lapse = No tax consequences
Employer taxation on a Nonqualified option - Stock
Employer may deduct the value of the stock option as a business expense
Qualified Options - Stock
There are two types of qualified options
- ISO - Incentive stock option
- ESPP - Employee stock purchase plan
ISO - Incentive Stock Option
Granted to a key employee and is a right to purchase stock at a discount
Requirements:
- Must be granted under an approved plan, approved by the shareholders.
- Must be granted within 10 years of the date when the plan was approved
- Exercise price may not be less than the FMV
- Employee may not own more than 10% of the combined voting power
- The employee must remain an employee of the corporation from the date the option is granted until 3 months before the option is exercise.
ISO - Incentive Stock Option Employee Taxation
- No taxation
- Basis = Exercise price plus any amount paid for the option
- Sale of Stock = Capital gain or loss
- Stock option lapse = No deduction
- Employee may exercise up to $100,000 of ISOs in a year
ISO - Incentive Stock Option Employer Taxation
An employer does not receive a tax deduction for an ISO because it is not considered compensation income to the employee
ESPP - Employee stock purchase plans
An ESPP may grant option to an employee to purchase stock in the corporation
Requirements
- The plan must be written and approved by the shareholders
- Cannot be provided to an employee who has 5% combined voting powers
- The plan must include all full-time employees other than highly compensated employees and those with less than two years of employment
- Exercise price may not be less than the lesser of 85% of the FMV of the stock when granted
- The option cannot be exercise more than 27 months after the grant date
- No employee can acquire the right to purchase more than $25,000 of stock per year
- The stock must be held at least 2 years after the grant date and at least one year after the exercise date
- The employee must remain an employee from the date the option is granted until 3 months before the option is exercise
ESPP - Employee stock purchase plan - Employee Taxation
Exercise Stock - No taxation
Basis - Exercise price plus any amount paid for the option
Sale of Stock - Capital gain or loss
Option lapse - No deduction is available - There is a loss of any amount paid for the option
ESPP - Employee stock purchase plan - Employer taxation
An employer does not receive a tax deduction for an ESPP
