Tuesday, October 04, 2005

Tax for employee stock option

There are several types of stock incentive
1. Incentive stock option
2. Restricted stock
A good article about incentive stock option http://www.fairmark.com/execcomp/iso.htm
For restricted stock, see http://www.rowbotham.com/stock_options/restricted_stock.htm

Key points
For incentive stock option,
1. No tax until exersize. No tax for receiving, vesting ISO.
2. When exercize, no REGULAR tax. There is tax for AMT, difference between market price and exercise price recognized as ordinary income
3. When sell, if qualifying for special holding requirement (>1 years after exercize, >2 years after receiving ISO), For REGULAR tax, taxed as capital gain with exercize price as tax basis. For AMT, taxed as capital gain with market price when exercising as tax basis.
4. When sell, if qualified as Qualified Small Business Stock, half the gain recognized as capital gain for REGULAR tax. 7% of the excluded gain need to be reported for AMT.


Instruction for AMT, for 6251

Line 12 - Qualified Small Business Stock
If you claimed the exclusion under section 1202 for gain on qualified small business stock held more than 5 years, multiply the excluded gain (as shown on Schedule D (Form 1040)) by 7% (.07). Enter the result on line 12 as a positive amount.

Line 13 - Exercise of Incentive Stock Options
For the regular tax, no income is recognized when an incentive stock option (ISO), as defined in section 422(b), is exercised. However, this rule does not apply for the AMT. Instead, you generally must include on line 13 the excess, if any, of:
1. The fair market value of the stock acquired through exercise of the option (determined without regard to any lapse restriction) when your rights in the acquired stock first become transferable or when these rights are no longer subject to a substantial risk of forfeiture, over
2. The amount you paid for the stock including any amount you paid for the ISO used to acquire the stock.
Note. Even if your rights in the stock are not transferable and are subject to a substantial risk of forfeiture, you may elect to include in AMT incomethe excess of the stock's fair market value (determineed without regard to any lapse restriction) over the exercise price upon the transfer to you of the stock acquired through exercise of the option. You must make the election by the 30th day after the date of the transfer. See Pub. 525, Taxable and Nontaxable Income, for more details.
If you acquired stock by exercising an ISO and you disposed of that stock in the same year, the tax treatment under the regular tax and the AMT is the same, and no adjustment is required.
Increase your AMT basis in any stock axquired through the exercise of an ISO by the amount of the adjustment. Keep adequate records for both the AMT and regular tax so that you may figure your adjustment. Seethe instructions for 16.

Topic 427 - Stock Options http://www.irs.gov/taxtopics/tc427.html

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