Steeple Corp. granted an incentive stock option (\"ISO\") to Regina, an employee, on January 1, 2010, when the option price and FMV of the Steeple stock was $80. The option entitled Regina to buy 10 shares of Steeple stock. Regina exercised the option and acquired the Steeple stock on April 1, 2012, when the stock’s FMV was $100. Regina, while still employed by the Steeple Corp., sold the stock on May 1, 2014, for $120 per share.
(a) What are the tax consequences to Regina and Steeple Corp. on the following dates: January 1, 2010; April 1, 2012; and May 1, 2014? (Assume all ISO qualifications are satisfied.)
(b) How would your answer to part (a) change if Regina instead sold the Steeple stock for $130 per share on May 1, 2012?
Incentive Stock Option Incentive stock options are a form of compensation given by an employer to employees in the form of stock rather than cash. In ISO the employer grants to the employee an option to purchase stock in the employer\'s corporation, or parent or subsidiary corporations, at a predetermined price, called the exercise price or strike price Strike prices are set at the time the options are granted, but the options usually vest over a period of time. If the stock increases in value, an ISO provides employees with the ability to purchase stock in the future at the previously locked-in strike price. This discount in the purchase price of the stock is called the spread. An ISO can taxed in two way they are: (1) on the spread (2) on any increase (or decrease) in the stock\'s value when sold or otherwise disposed Inorder to calculate tax treatment of ISO we need following information, (a)Grant date: the date the ISOs were granted to the employee (b)Strike price: the cost to purchase a share of stock (c)Exercise date: the date on which you exercised your option and purchased shares (d) Selling price: the gross amount received from selling the stock (e)Selling date: the date on which the stock was sold. How ISOs are taxed depends on how and when the stock is disposed,Disposition of stock means when the employee sells the stock, but it can also include transferring the stock to another person or giving the stock to charity. A qualifying disposition of ISOs simply means that the stock, which was acquired through an incentive stock option, was disposed more than two years from the grant date and more than one year after the stock was transferred to the employee (usually the exercise date). Exercising an ISO is treated as income solely for the purpose of calculating the alternative minimum tax (AMT), but is ignored for the purpose of calculating the regular federal income tax. The spread between the fair market value of the stock and the option\'s strike price is included as income for AMT purposes. inclusion of the ISO spread in AMT income is triggered only if you continue to hold the stock at the end of the same year in which you exercised the option. If the stock is sold within the same year as exercise, then the spread does not need to be included in your AMT income. A qualifying disposition of an ISO is taxed as a capital gain at the long-term capital gains tax rates on the difference between the selling price and the cost of the option. The employers are not required to withhold taxes on the exercise or sale of incentive stock options. (a) (1) on january 2010 no tax is requied to pay because option was not excised by the employee, (2) on April 1/2012 ISO is taxed on the basis of spread that is purchase price - FMV ,so spread is 100-80=20 per share so the total spread value =20 X10=200 this spread is included in income for AMT,this inclusion is triggerd only if we continue to hold the stock at the end of the year. If you sold of the sock with in the same year the spread does not need to include on AMT.there for this is included in income for AMT. (3) On May 1/2014 It is a qualifying disposel ,so ISO is taxed as a capital gain on the difference between selling price and cost of option that is 120 -80 =40 per share (b) on may1/2012 this is a disqualifying disposal Disqualifying ISO dispositions are taxed in two ways: there will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates). The amount of compensation income is determined as follows: if you sell the ISO at a profit, then your compensation income is the spread between the stock\'s fair market value when you exercised the option and the option\'s strike price. Any profit above compensation income is capital gain.
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