Deferred Compensation (ISOs and NQSOs)

NQSO taxation on grant? taxation on exercise? taxation on sale?

- no tax on grant - remember, you're buying the NQSO with already taxed money. - taxation is ordinary income on exercise based on the difference between FMV and Strike price - tax on sale is capital gains based on the FMV of the stock at the time of exercise.

If an employee receiving incentive stock options does not meet the employment time requirement, but receives options as a nonqualified and exercises them, what will the consequences be? 1. The employee will be required to recognize income immediately upon receipt of the options. 2. The employee will be required to recognize compensation income in the year the option is exercised. 3. If an employee meets the holding period requirement, it does not matter whether he or she meets the employment requirement and the option is qualified. 4. There are no consequences to this circumstance.

2. Why the f*** 2 though? why would the em

Your clients, Nick and Betty Jo Byoloski, have come to you with some questions. She has been an employee of April Corporation for several years and received some stock options as compensation at times. He has worked with April Corporation as a consultant on several jobs over the last few years and was paid in part with stock options. Nick and Betty Jo want to know more about their situation regarding the options. What can you tell them?

Because Nick is not an employee, we know that his options are non-qualified. We cannot be sure about Betty's without more information.

Which of the following statements regarding ISOs and NQSOs is correct? A.The tax treatment of a cashless exercise of an ISO is the same as the cashless exercise of a NQSO. B.One of the disadvantages of an ISO is that the sale of the stock attributable to an ISO may result in the taxpayer paying alternative minimum tax. C.IRC 409A provides harsh penalties when a company grants an ISO or NQSO with a strike price that exceeds the current FMV of the employer's tax. D.To the extent that the aggregate fair market value of stock with respect to which incentive stock options are exercisable for the 1st time by any individual during any calendar year exceeds $100,000, such options shall be treated as options which are not incentive stock options.

D. Choice a is not correct as the tax treatment is not the same for a cashless exercise of an ISO and an NQSO. ISO is not subject to payroll tax, NQSO is subject to payroll tax. They will be the same for income tax; both ordinary income. Choice b is not correct. The sale of an ISO share of stock will generally have a negative adjustment for AMT, not positive, and therefore, it would not result in AMT. Choice c is not correct as 409A would apply if the strike price was less than the FMV on the date of grant.

Eric works for Carpets, Inc. Carpets, Inc issued him both ISOs and NQSOs during the current year. Which of the following would be the most compelling reason why they might issue both ISOs and NQSOs? 1. They want to issue over $80,000 in options that are exercisable in the same year. 2. The NQSOs and ISOs are exercisable in different years. 3. The company wants to provide the NQSOs to assist the individual in purchasing the ISOs. 4. Since they are virtually the same there is no compelling reason to issue both in the same year.

The correct answer is 3. When both ISOs and NQSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100,000 limit on ISOs.

David is awarded an immediately vested, non-qualified stock option for 1,000 shares of company stock with an exercise price of $35 per share while the stock price is currently $33 per share. What are the tax ramifications, if any at the date of the grant? a. 0 b. Because these are unrealized gains, neither the option value nor the gain are taxable until the stock is finally sold.

The correct answer is A. In the case of NQS Options, the option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.

ISO - meaning - tax

incentive stock option a right to allow the employee to purchase at a stated exercise price

what does cashless NSQO/ISO mean?

it means not paying the cost of obtaining the shares - you're using the Appreciated FMV (and selling) the stock to cover the costs of obtaining the shares.

Wilber receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $15. Wilber exercises these options 3 years from the date of the grant when the FMV of the stock is $35. Wilber then sells the stock 3 years after exercising for $45. explain the taxes on this event.

ltcg of $30. meets the holding period requirements

can non-employees receive qualified stock options?

no.

For tax determination purposes, the holding period of a nonqualified option is determined to begin by which of the following?

on the date of exercise. The security holding period in the case of a non-qualified options begins on the date the option is exercised.

in NQSO how is the exercise vs FMV price taxed?

ordinary income, subject to withholdings, payroll tax, etc.

bargain element taxation? holding period

the difference between the fair market value of the employer's stock and the amount employees pay to acquire the employer's stock. taxation - employee just pays capital gains tax on the difference b/t the fair market value, and the exercise price. Holding period - for the preferential tax treatment, a dual holding period must be met. you must wait 2 years from the date the stock was granted, and 1 year from the date the stock was exercised.

Cashless ISO vs Cashless NQSO

the key difference is in the immediate tax treatment of the spread: ISOs may avoid immediate income tax if the holding period requirements are met, while NQSOs generally result in immediate ordinary income tax upon exercise.

You are in the process of advising your business client with regard to a non-qualified stock option plan that he is considering newly instituting as a program in his business for his employees. Before beginning, which of the following are questions that must be addressed as essential and pertinent to the stock option issue? 1. What is the earliest date you can exercise the option? 2. What do you need to do when you exercise the option? 3. Can you exercise using stock you own? 4. When will the option terminate? 5. Can you exercise after your employment terminates?

this is all PERTINIENT information that both the employer and the employee need to know.