Employee Stock Options

Question 1

Nonqualified (Readily Ascertainable Value)

Answer 1

Ordinary income @ Grant = market value of option
Basis = exercise price @ Grant + ordinary income
Capital gain/loss if lapse = SP - AB

Question 2

Nonqualified (Without Readily Ascertainable Value)

Answer 2

Ordinary income @ Exercise = Exercise - grant price
Basis = exercise price @ Grant + ordinary income
No tax consequences if lapse

Question 3

Nonqualified Options: Employee and Employer

Answer 3

Employees: Taxed
Employer: Deduct a business expense in year employee recognized the ordinary income

Question 4

Incentive Stock Option

Answer 4

Granted within 10 years of earlier when plan was adopted or approved. Must be exercisable within 10 years of grant date
Option exercise price can’t be less than FMV stock @ Grant
Can’t own > 10% voting power

Question 5

Employee Stock Purchase Plan

Answer 5

Can’t be exercised more than 27 months after grant
Option exercise price can’t be less than LESSER of 85% FMV stock when granted or exercised
Can’t own > 5% voting power