Chapter 1 Section 4: Employee Stock Options

Question 1

When is a nonqualified option taxed?

Answer 1

When granted if it has a readily ascertainable value when granted. This is ordinary income. No taxation when exercised. Upon sale, take the sale price less the basis (exercise price plus anything previously taxed) and this is a capital G/L
Otherwise, it is taxed when exercised. It is ordinary income based on FMV of stock. Upon sale, take the sale price less the basis (exercise price plus ordinary income recognized) and that is a capital G/L

Question 2

When does the employer deduct a nonqualified option?

Answer 2

In the year the employee reports the income

Question 3

What are the types of qualified options?

Answer 3

Incentive stock options

Employee stock purchase plans

Question 4

What is an incentive stock option?

Is it taxable?

Answer 4

It is granted to a key employee and is a right to purchase the stock at a discount. Less than 10% owner with an exercise price more than the FMV of the stock on grant date.
The employee does not count it as taxable compensation. Recognize capital G/L when sold.
The employer does not get a tax deduction.

Question 5

What is an employee stock purchase plan?

Is it taxable?

Answer 5

It grants options to employees to purchase stock in the corporation. Less than 5% owner with an exercise price more than the lesser of 85% of FMV of stock on grant or exercise date. it cannot be exercised more than 27 months after grant date.
It is not taxable as compensation, but recognize a capital G/L when sold.
The employer does not get a tax deduction.