R1 - ESOP

Question 1

NonQualified ESOP - With RAV (established market)

Answer 1

• Tax when granted
• Employee recognizes RAV as ordinary income
• No taxation on date of exercise.
• Basis is option price + PTI amounts on grant date.
• Future sale of stock will result in Cap Gain/Loss
• Holding period starts on exercise date.
• If option lapses, it has Cap Loss on PTI

Question 2

NonQualified ESOP - Without RAV

Answer 2

• Tax when exercised
• Taxable amt = FMV exercise date - Stock Option Price
• Employee recognizes as ordinary income
• Basis is option price + PTI amounts on exercised date
• Future sale of stock will result in Cap Gain/Loss
• Holding period starts on exercise date.
• If option lapses, it has no tax consequences

Question 3

Nonqualified ESOP = Employer Taxation

Answer 3

• ER deducts expense in same year EE reports income.

Question 4

Qualified Options = ISO

Answer 4

Must be:

1. Approved by SH
2. Granted with 10 yrs of approval
3. Exercise price > FMV on grant date
4. EE is < 10% owner on grant date
5. Once exercised, the stock must be held at least 2 yrs
6. EE must remain an EE for 3mo before option is exercised

Question 5

Qualified Options = ISO EE Taxation

Answer 5

• Not taxable income when granted or exercised.
• Basis is exercise price + amts paid for option
• Taxable as Cap Gain when sold.
• If option lapses, no deduction is available as the option was not taxed in first place.
• Exercisable up to $100K/Yr; excess will be NonQualified.
• FMV on date of exercise - Purchase Price is AMT.

Question 6

Qualified ESOP = Employer Taxation

Answer 6

No tax deduction

Question 7

Qualified Options = ESPP

Answer 7

Must be:

1. Written and Approved by SH
2. EE is < 5% owner on grant date
3. All full-time EEs with >2yrs tenure, except HCE
4. Exercise price > 85% FMV on grant date
5. Once granted, the stock must be exercised in the next 27mo.
6. EE can’t buy >$25K of stock per yr
7. Once exercised, the stock must be held at least 2 yrs and at least one year after the exercise date.
8. EE must remain an EE for 3mo before option is exercised

Question 8

Qualified Options = ESPP EE Taxation

Answer 8

Same as ISO, except for AMT item.

FMV - 85% = Ordinary income