REG 1 Employee Stock Options

Question 1

Describe readily ascertainable value when dealing with nonqualified employee stock options?

Answer 1

Taxable when granted: if the option is traded on an est. mkt. it will have a readily ascertainable value Or if it is transferable, exercisable immediately, no sig. conditions or restrictions, and the FV of the option privilege is readily ascertainable.
If there is no readily ascertainable value, it’s taxed at exercise.
Employer deducts in same year recognized as ordinary income.

Question 2

What is an ISO and what are the requirements for the exercise price and the holding period requirements?

Answer 2

1. An incentive stock option - usually granted to a key employee and is a right to purchase the stock at a discount.
2. May not be less than the FMV of the stock at the date of the grant.
3. Once exercise, the stock must be held at least two years after the grant date And at least one year after the exercise date.

Question 3

What is an ESPP, the exercise price requirements, the exercised date requirements, the limitations of rights to purchase stock, and the holding period requirements?

Answer 3

1. Employee stock purchase plan - may grant options to employees to purchase stock in the corporation.
2. May not be less than the lesser of 85% of the FMV of the stock when granted or exercised.
3. Cannot be exercised more than 27 months after the grant date.
4. No more than $25,000/year.
5. Once exercise, the stock must be held at least two years after the grant date And at least one year after the exercise date.