REG 1. M6

Question 1

Qualified plan for ISO

Answer 1

• No tax when granted
• No tax when exercised
• All the tax when sold

Question 2

Non-Qualified plan for ISO

Answer 2

• Some tax immediately

- Plus balance when sold

Question 3

What are the requirements for a Qualified ISO?

Answer 3

• ISO must be granted under a plan approved by the shareholders
• Options must be granted within 10 years of the earlier of the date when the plan was adopted or approved
• Options must be exercisable within 10 years of the grant date
• Exercise price may not be less than athe FMV of the stock at the date of the grant
• Employee may not own more than 10% of the voting power
• Once exercised the stock must be held at least 2 years after the grant date and at least one year after the exercise date

Question 4

When is a Non-Qualified option taxed?

Answer 4

taxed when granted if the option has a readily ascertainable value at the time of the grant

Question 5

What does it mean to have readily ascertainable value?

Answer 5

Option is traded on an established market, then the option has readily ascertainable value and taxed at Grant

Question 6

If a Non-Qualified option does not have readily ascertainable value, when is it GENERALLY taxed?

Answer 6

Taxed when EXERCISED

Question 7

If an option is not traded on the market, what critieria must be met to have readily ascertainable value?

Answer 7

ALL critieria must be met:

1) Option is transferable
2) exercisable immediately in full when it’s granted
3) no conditions or restrictions that would have significant effect on value
4) FV of the option is readily ascertainble

Question 8

What is the Employee taxation on an option with readily ascertainable value

Answer 8

• taxable when granted
• Ordinary income in the year granted
• value of option - cost

Question 9

For a nonqualified option that has readily ascertainable value- is there any taxation on the date of the exercise?

Answer 9

NO. taxable when granted

Question 10

What is the basis of the stock for nonqualified- readily ascertainable value?

Answer 10

Basis of stock is the exercise price + any amount previously taxed on the date of the grant. Holding period begins with exercise date

Question 11

What is the employee taxation on an option with no readily ascertainable value?

Answer 11

• Taxed when EXERCISED
• ordinary income
• difference between FMV of stock and stock option price exercised

Question 12

What is the basis of the stock for nonqualified option with no readily ascertainable value?

Answer 12

Basis of stock = FMV of the stock when stock option was exercised

Question 13

Employer taxation for nonqualified option with no readily ascertainable value?

Answer 13

Deduct the FMV of the stock in the SAME year that the employee recognizes the option as ordinary income

Question 14

ISO - employee taxation

Answer 14

• Not taxable income when granted or exercised

- Taxable as Captial Gain/Loss when SOLD

Question 15

ISO- employer taxation

Answer 15

generally, employer does NOT receive a deduction for ISO because it’s not compensation income

Question 16

ESPP (employee stock purchase plans) Requirements

Answer 16

1) plan must be written and approved by shareholders
2) ESPP cannot grant options to employee who has 5% or more of voting power
3 Plan must include ALL full time employees
3) Option exercise price may NOT be less than lesser of 85% of the FMV of teh stock when granted or exercised
4) once exercised must be held at least 2 years after grant date and at least 1 year after exercise date

Question 17

ESPP employee taxation

Answer 17

• Not taxable income at grant or exercise date

- Capital gain/loss when sold

Question 18

ESPP employer taxation

Answer 18

NO tax deduction