This chapter discusses incentive stock options – the tax-favored plan which does not normally result in taxable income either at time or grant or at exercise. Advantages and disadvantages are covered, with the primary benefits being one of preferred tax treatment and no real out-of-pocket cost to the company. | A tax-favored plan for compensating executives by granting options to buy company stock If ISO meets IRS requirements, executive is taxed only when stock sold What is it? Copyright 2009, The National Underwriter Company For executive compensation in larger corporations NOT appropriate for closely-held corporations When is it Indicated? Copyright 2009, The National Underwriter Company greater tax deferral for executive than nonstatutory stock option income from sale of stock obtained through exercise of ISO may be eligible for preferential capital gain treatment little to no out-of-pocket cost to company Advantages Copyright 2009, The National Underwriter Company Granting corporation does not usually get tax deduction at any time must meet complex technical requirements ISO exercise price must equal or exceed fair market value of stock when option granted executive must have cash to exercise option executive may incur alternative minimum tax (AMT) liability when ISO option exercised Disadvantages Copyright 2009, The National Underwriter Company Executive is not subject to federal income tax on an ISO when option granted or exercised; taxes deferred until disposition of stock To obtain this tax treatment for ISOs numerous requirements must be met Tax Implications Copyright 2009, The National Underwriter Company To obtain special tax treatment: options granted in written plan that specifies number of shares to be issued class of employees covered under the plan (no nondiscrimination rules) only first $100,000 of ISO stock granted to any one employee, which becomes exercisable for first time during any one year, is entitled to favorable tax treatment options must be exercised within 10 years of grant Tax Implications Copyright 2009, The National Underwriter Company To obtain special tax treatment: person receiving grant must be employed with granting company at all times between grant of option and 3 months before date of exercise stock acquired | A tax-favored plan for compensating executives by granting options to buy company stock If ISO meets IRS requirements, executive is taxed only when stock sold What is it? Copyright 2009, The National Underwriter Company For executive compensation in larger corporations NOT appropriate for closely-held corporations When is it Indicated? Copyright 2009, The National Underwriter Company greater tax deferral for executive than nonstatutory stock option income from sale of stock obtained through exercise of ISO may be eligible for preferential capital gain treatment little to no out-of-pocket cost to company Advantages Copyright 2009, The National Underwriter Company Granting corporation does not usually get tax deduction at any time must meet complex technical requirements ISO exercise price must equal or exceed fair market value of stock when option granted executive must have cash to exercise option executive may incur alternative minimum tax (AMT) liability when ISO option
