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CPWA > Planning for Executives - 1 Planning implications of stock option award programs > Flashcards

Planning for Executives - 1 Planning implications of stock option award programs Flashcards

1
Q

What is an AMT (Alternative Minimum Tax)?

A

An AMT places a floor on the amount that a filer must pay to the government
-An income system that runs parallel to the “regular” income tax system.
-Its intended purpose is to make sure that taxpayers with the financial wherewithal to take advantage of tax preferences to reduce or eliminate their regular income tax actually pay their fair share of tax.
-Applies to individuals, corporations and
trusts and estates

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2
Q

Why are fewer people subject to AMT due to the Tax Cuts and Jobs Act (“TCJA”)?

A

Loss of Deductions: The change/ reduction/ elimination of deductible items has equalized AMT and regular tax bills.

Higher Exemption: AMT Exemption amount is much higher

Greater Retention of Exemption: AMT used to be subject to a phase-out for families above the AMT threshold

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3
Q

For individuals, there are 2 AMT rates: __% and __%

A

26; 28

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4
Q

What does the following acronym that notes AMT preferences stand for?

Please Send My Christmas Stockings & Presents to DC Immediately

A

-Personal Exemption 2018 and before
-Standard Deduction
-Miscellaneous itemized deductions- pre 2018
-Capital gains differences
-Capital gain or loss (including any carryover that is different for the AMT) reported on Form 8949, Sales and Other Dispositions of Capital Assets, or Schedule D (Form 1040), Capital Gains and Losses.
-State Local Taxes and Property Taxes
-Private activity bonds Interest
-Deductions for accelerated depreciation/depletion differences
-Incentive stock option spread on exercise

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5
Q

How do you go about calculating AMT?

A

Step 1: AMT Income= Taxable Income + Preferences

Step 2: AMT Base or AMTTI= AMTI- AMT Exemption= AMTTI (AMT Taxable Income)

NOTE: AMT Exemption – varies depending on the year and filing status. *For 2018 and forward, the exemption is phased out for high levels of AMTI ($1M for MFJ)

Step 3: Calculate tentative minimum tax:

AMT Base * Rates factoring in thresholds AMTTI * AMT Tax Rate

Step 4: AMT Tax= Tentative tax- Regular income tax

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6
Q

What is a non qualified-stock option?

A
  • Type of employee stock option wherein you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option
    -Give employees the right, within a designated timeframe, to buy a set number of shares of their company’s shares at a preset price.
    -The price of these stock options is typically the same as the market value of the shares when the company makes such options available, also known as the grant date.
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7
Q

What is an ISO (Incentive Stock Option)?

A

-A corporate benefit that gives an employee the right to buy shares of company stock at a discounted price with the added benefit of possible tax breaks on the profit.
-Intended to retain key employees or managers.
-The profit on qualified ISOs is usually taxed at the capital gains rate, not the higher rate for ordinary income

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8
Q

What are some strategies for exercising an NSO stock option?

A

-Employee pays exercise cost and holds stock
-Funds are borrowed
-Cashless Exercise (Employee sells enough shares to cover the cost of the option)
-Exchanging existing shares to cover exercise cost and related payroll tax

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9
Q

What are some strategies for exercising an ISO stock option?

A

-Employee pays exercise cost and holds stock
-Funds are borrowed
-Cashless Exercise (Employee sells enough shares to cover the cost of the option)
-Exchanging existing shares to cover exercise cost and related payroll tax
-Staggering ISO Exercises
-Planning for restricted stock
-Use of leverage to buy dividend-paying stock
-Exchange stock for stock

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10
Q

Either an ____ or a ___________ stock option allows an employee to acquire company stock for an exercise cost that is below the market value of the stock

A

ISO; nonqualified stock option

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11
Q

True or False: With respect to a nonqualified stock option, the employee is taxed to the extent the market value of the stock exceeds the exercise cost

A

True

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12
Q

True or False: with respect to an ISO, the employee is taxed only when the stock acquired by the exercise of the option is sold.

A

True

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13
Q

True or False: In all cases, an ISO is treated in the same way as a nonqualified stock option is treated for income tax purposes.

A

False: For AMT purposes, an ISO is treated in the same way as a nonqualified stock option is treated for income tax purposes.

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14
Q

In the computation of AMTI, taxable income is increased by the difference between the value of the stock and the _____ of the stock. For this purpose, _____ includes the exercise cost plus any transactional costs. (one word)

A

basis

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15
Q

True or False: In the tax year the stock is ultimately sold, the taxpayer is entitled to a reduction of ATMI to the extent of the difference between the amount recognized for regular income tax purposes over the amount of “gain” the taxpayer previously included in AMTI.

A

True

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16
Q

How are gains taxed for NSOs for AMT?

A

Higher Ordinary Income Tax

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17
Q

How are gains taxed for ISOs for AMT?

A

Taxed from AMT

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18
Q

How are gains taxed for ISOs for regular income taxes?

A

Taxed at LTCG (20%) rate

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19
Q

How are gains taxed for NSOs for regular income taxes?

A

Taxed at ordinary income (40%) rate

20
Q

What is difference between ISOs and NSOs?

A

ISOs are more favorited due to tax purposes and long term gains compared to NSOs, but have more restrictions than NSOs

21
Q

What are the AMT Key Figures for ISO Qualifying Disposition?

A

*Values are AMTTI

22
Q

What are stock swaps?

A

A stock swap is the exchange of one equity-based asset for another, where, during the merger or acquisition, the swap provides an opportunity to pay with stock rather than with cash

23
Q

What is an ISO qualifying disposition?

A

A ‘qualifying disposition’ is a sale of shares greater than two years after the ISO grant date and one year after the exercise date.

24
Q

What is a tandem exercise?

A

Any arrangement whereby two options, an Incentive Stock Option and a Non-statutory Option, are issued and the exercise of one option affects the right to exercise the other.

25
Q

What are the goals of ISO qualifying disposition?

A

Goal to recognize LTCG while avoiding alternative minimum tax (AMT)
―Exercise ISOs in first quarter of Year 1
―Triggers potential AMT tax due April 15 of Year 2
―Hold stock to meet qualifying disposition
―Sell stock before April 15 to pay tax due, exercise next traunch
―Downside risk is stock price declines in year

26
Q

Who can do a ISO tandem exercise?

A

Applicable for those holding both NSOs and ISOs
* Done by selectively exercising a specific amount of each

27
Q

What are the objectives of a ISO tandem exercise?

A

Produce LTCG on ISO bargain element through qualifying
disposition
– Avoid AMT by increasing regular income taxes via NSO
exercise

28
Q

What is a tradeoff of ISO tandem exercise?

A

Earlier recognition of NSO income that would
eventually be recognized

29
Q

How are ISOs taxed at grant?

A

No tax if granted at FMV.

30
Q

How are ISOs taxed at vesting?

A

No tax if granted at FMV.

31
Q

How are ISOs taxed at exercise?

A

AMT tax on bargain element. No ordinary, capital gains, or employment tax.

32
Q

How are ISOs taxed at sale?

A

Long-term capital gains tax if held 1 year past exercise and 2 years past grant date. Otherwise, ordinary income tax (including immediate sale).

33
Q

How are NQSOs taxed at grant?

A

No tax if granted at FMV.

34
Q

How are NQSOs taxed at vesting?

A

No tax if granted at FMV.

35
Q

How are NQSOs taxed at exercise?

A

Ordinary income tax on bargain element. Income and employment tax as well.

36
Q

How are NQSOs taxed at sale?

A

Long-term capital gains if held 1 year past exercise. Otherwise, ordinary income tax (including immediate sale).

37
Q

What client opportunity exist in planning for executives for corporate insiders?

A

Executive compensation

38
Q

What client opportunity exist in planning for executives?

A

Intergenerational transfers

39
Q

What client opportunity exist in planning for executives for foundations and endowments?

A

significant donations

40
Q

What client opportunity exist in planning for executives for business owners?

A

M&A shares

41
Q

What client opportunity exist in planning for executives for employee plans?

A

401K matches and ESOPS

42
Q

What client opportunity exist in planning for venture investors?

A

IPO exit holdings

43
Q

What client goals do clients typically have for their executive compensation plans?

A

Preserve wealth
Provide current liquidity
Fulfill charitable intent
Minimize tax impact
Maximize the value of holding
Effective wealth transfer

44
Q

What obstacles relating to company constraints exist when planning for executives?

A

Limited trading window
Imposed lock-ups
Company mandates

45
Q

What obstacles relating to information processing exist when planning for executives?

A

Tax ramification
reporting
Confusing plan document

46
Q

What obstacles relating to investor challenges exist when planning for executives?

A

Concentration risk
Lack of coordination
Access to qualified advice
Procrastination

CPWA (99 decks)

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