R1: Employee Stock Options

Question 1

When does the employer recognize a deductible expense for a nonqualified stock option?

Answer 1

In the same year that the taxpayer will recognize ordinary income

Question 2

Qualified stock options

Answer 2

ISO (incentive stock option)

ESPP (employee stock purchase plans)

Question 3

Incentive stock option, year of received

Answer 3

No compensation income reported

Question 4

Holding period for ISOs

Answer 4

Once exercised, the stock must be held at least two years after the grant date and at least one year after the exercise date

Question 5

ESPP Rules

Answer 5

• The option exercise price may not be less than the lesser of 85% of the FMV of the stock when granted or exercised
• The option cannot be exercised more than 27 months after the grant date

Question 6

Income for qualified stock options

Answer 6

• The year of grant, the employee recognizes ordinary income for the FMV of the value of the options (if known)
• When sold, employee recognizes a capital gain

Question 7

Deductions for qualified stock options

Answer 7

Not deductible for the employer

Question 8

Deductions for nonqualified stock options

Answer 8

Deductible for the employer

Question 9

When are nonqualified stock options taxable?

Answer 9

When exercised

Question 10

When are qualified stock options taxable?

Answer 10

When sold, as a capital gain