Planning for Executives - 2 Tax planning implications of exercises of both incentive and non-qualified stock options (e.g. basis, holding periods, and alternative minimum tax (AMT)) Flashcards
Who are the eligible participants of an NSO?
Employees, Directors, Consultants
Who are the eligible participants of an ISO?
Employees
True or False: NSOs are transferrable
True
ISOs are nontransferable except at _____.
death
Do NSOs have a grant limit?
no
Do ISOs have a grant limit?
yes- $100,000 rule:
If an employee receives more than $100,000 in exercisable ISOs in a calendar year, any ISOs that surpass the $100K mark will be considered NSOs for tax purposes.
What is the triggering event for an NSO
exercising the stock option
What is the triggering event for an ISO
sale of stock
True or False: NSOs are taxed as ordinary income, while ISOs are taxed as LTCG potential
True
What the AMT impact on NSOs and ISOs?
NSO: none
ISO: Preference item at exercise
When do ISOs and NSOs generally expire
10 years
Taxation at Exercise for NSOs
Employee: Bargain element, spread (market value- exercise price) - added to W-2 and taxed at ordinary income- subject to payroll taxes
Employer: Benefits in 2 ways:
1. Receives gross exercise cost
2. Receives a tax deduction for compensation element taxed to the employee
In the case of restricted stock, the recognition of the bargain element is deferred until restriction lapses, and the gain is calculated using the FMV at the time of lapse.
Taxation at Exercise for ISOs
ISOs aren’t taxed when granted, upon vesting or when exercised.
What is the holding period for NSOs?
Holding period for capital gain begins on the date the restriction lapses in the case of restricted stock.
Holding period for unrestricted stock is exercised date.
What is the holding period for ISOs?
For all capital gains at sale to be taxed at favorable long-term rates, you must hold your ISO shares for more than:
-two years from your option grant date PLUS
-one year from the date of option exercise
The full gain over the exercise price is then all capital gain.
What is the basis for NSOs and ISOs?
NSO: The employee’s basis is the amount paid for the stock plus any amount included in income upon exercising the option.
ISO: The cost basis of the ISO shares is the price paid for regular tax purposes: the exercise or strike price. It’s the strike price plus the AMT adjustment, the amount reported on Form 6251, line 2i, for AMT purposes.
Which are issued more frequently? NSOs or ISOs?
NSOs
Why are NSOs given more frequently?
-Company receives a tax deduction
-No limitations on how much can be given
Why are ISOs given less frequently?
-Company receives no tax deduction
-Limitations on how much can be given-$100,000 rule
What is the bargain element?
The difference between the exercise price and the market price on the day you exercised the options and purchased the stock.
What is the $100,000 rule?
The maximum number of options that an employee can receive and treat as ISOs is limited to $100,000 worth based on the price of the stock at the time of the award that becomes exercisable for the first time in a calendar year.
NSOs Graph Example
ISO Graph Example
What is a qualifying disposition?
Qualifying dispositions occur when shares are held for the required holding periods — which means they’ll receive a more preferential tax treatment
What is a non-qualified disposition?
Disqualifying dispositions occur when shares are not held for the required holding periods — which means they won’t receive preferential tax treatment.
What are the rules for a qualifying disposition?
If you have a qualifying disposition, the profit will be taxed at long-term capital gains.
Rules:
- hold at least one year after purchase date
- hold at least 2 yrs after option purchase date
What are the rules for a non-qualified disposition?
If you have a disqualifying disposition, the realized gain (if any) will likely be taxed as a combination of ordinary income and capital asset tax rates
Rules:
- at least one year after purchase date
- less than 2 years
What are some tax implications on dividends for NQSO’s?
Do restricted stock awards allow for voting rights before and after vesting? (True or False)
True
What conditions must be met for a qualified disposition of an ISO?
The holding period must be 2 years from the grant and an additional 1 year from exercise.
