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))

Question 1

Who are the eligible participants of an NSO?

Answer 1

Employees, Directors, Consultants

Question 2

Who are the eligible participants of an ISO?

Answer 2

Employees

Question 3

True or False: NSOs are transferrable

Answer 3

True

Question 4

ISOs are nontransferable except at _____.

Answer 4

death

Question 5

Do NSOs have a grant limit?

Answer 5

no

Question 6

Do ISOs have a grant limit?

Answer 6

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.

Question 7

What is the triggering event for an NSO

Answer 7

exercising the stock option

Question 8

What is the triggering event for an ISO

Answer 8

sale of stock

Question 9

True or False: NSOs are taxed as ordinary income, while ISOs are taxed as LTCG potential

Answer 9

True

Question 10

What the AMT impact on NSOs and ISOs?

Answer 10

NSO: none
ISO: Preference item at exercise

Question 11

When do ISOs and NSOs generally expire

Answer 11

10 years

Question 12

Taxation at Exercise for NSOs

Answer 12

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.

Question 13

Taxation at Exercise for ISOs

Answer 13

ISOs aren’t taxed when granted, upon vesting or when exercised.

Question 14

What is the holding period for NSOs?

Answer 14

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.

Question 15

What is the holding period for ISOs?

Answer 15

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.

Question 16

What is the basis for NSOs and ISOs?

Answer 16

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.

Question 17

Which are issued more frequently? NSOs or ISOs?

Answer 17

NSOs

Question 18

Why are NSOs given more frequently?

Answer 18

-Company receives a tax deduction
-No limitations on how much can be given

Question 19

Why are ISOs given less frequently?

Answer 19

-Company receives no tax deduction
-Limitations on how much can be given-$100,000 rule

Question 20

What is the bargain element?

Answer 20

The difference between the exercise price and the market price on the day you exercised the options and purchased the stock.

Question 21

What is the $100,000 rule?

Answer 21

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.

Question 22

NSOs Graph Example

Answer 22

Question 23

ISO Graph Example

Answer 23

Question 24

What is a qualifying disposition?

Answer 24

Qualifying dispositions occur when shares are held for the required holding periods — which means they’ll receive a more preferential tax treatment

Question 25

What is a non-qualified disposition?

Answer 25

Disqualifying dispositions occur when shares are not held for the required holding periods — which means they won’t receive preferential tax treatment.

Question 26

What are the rules for a qualifying disposition?

Answer 26

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

Question 27

What are the rules for a non-qualified disposition?

Answer 27

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

Question 28

What are some tax implications on dividends for NQSO’s?

Answer 28

Question 29

Do restricted stock awards allow for voting rights before and after vesting? (True or False)

Answer 29

True

Question 30

What conditions must be met for a qualified disposition of an ISO?

Answer 30

The holding period must be 2 years from the grant and an additional 1 year from exercise.