REG 1 - Employee Stock Options Flashcards
What are the two types of employee stock options?
1) Nonqualified options
2) Qualified options
What are the two types of qualified stock options?
1) Incentive Stock Options (ISO)
2) Employee Stock Purchase Plans (ESPP)
When is a nonqualified option taxed?
Nonqualified options are taxed:
1) When granted if the option has a readily ascertainable value.
2) When exercised if the option does not have a readily ascertainable value.
Define readily ascertainable value?
- If the option is traded on an established market
OR if all the following are met:
1) The option is transferable
2) The option is exercisable immediately in full when it is granted
3) There are no conditions or restrictions that would have a significant effect on the value
4) The fair value of the option privilege is readily ascertainable
Define employee taxation of a nonqualified option that HAS a readily ascertainable value on following:
1) Grant date
2) Exercise date
3) Future sales transactions
1) The employee recognizes ordinary income on the GRANT DATE
2) There is NO taxation on the date of exercise
3) Any future sale results in a capital gain or loss
Define employee taxation of a nonqualified option that does NOT have a readily ascertainable value on following:
1) Grant date
2) Exercise date
3) Future sales transactions
1) There is NO taxation on the date of grant
2) The employee recognizes ordinary income on EXERCISE DATE
3) Any future sale results in a capital gain or loss
How do you calculate income recognized on grant date of nonqualified option that has a readily ascertainable value?
Current selling price x amount of shares
- Use current selling price because there is a market value (readily ascertainable value).
Example: Bob was granted 200 shares of nonqualified stock at $12 per share. The option is selling for $4.
Current selling price = $4
x 200 shares
= $800
How do you calculate income recognized on exercise date of nonqualified option that does NOT have a readily ascertainable value?
(FMV of stock currently trading less the amount you can purchase stock) x employee stock options.
Example: Betty has 50 employee stock options, with the right to purchase 10 shares of her company stock for $5. The stock is currently trading at $20.
FMV of stock currently trading = $20 Less: Amount you can purchase at = $5 = $15 x 500 shares (50 x 10) = $7,500
How do you calculate basis of nonqualified options?
(Grant date or Exercise date income recognized) + (original amount you can purchase stock x employee stock options)
Example: Betty has 50 employee stock options, with the right to purchase 10 shares of her company stock for $5. The stock is currently trading at $20.
How do you calculate amount of income recognized on the future sale of nonqualified option?
(Selling price of stock x # of shares) less adjusted basis)
Define employer taxation of nonqualified option: whether the nonqualified option HAS a readily ascertainable value, or the nonqualified option does NOT have a readily ascertainable value.
Employers can deduct expense in the same year the employee recognizes ordinary income:
E.g. If employee HAS a readily ascertainable value, the employee recognizes income on date GRANTED - that is when employer recognizes expense.
E.g. If employee does NOT have a readily ascertainable value, the employee recognizes income on date EXERCISED - that is when employer recognizes expense.
Define employee taxation of Incentive Stock Options (ISO)?
1) NOT taxable income as compensation (when granted or exercised)
2) Capital gain/loss when sold
Define employee taxation of Employee Stock Purchase Plans (ESPP)?
1) NOT taxable income as compensation (when granted or exercised)
2) Capital gain/loss when sold
EXCEPTION: if option price is less than FMV of the stock then:
FMV
Less: 85%
= Ordinary income
Define employer taxation of Incentive Stock Options (ISO) and Employee Stock Purchase Plans (ESPP)?
There is no tax deduction for employers.
