In the last issue click herewe looked at so-called Non-Statutory or Non-Qualified Stock Options NSSOs. This time, we will look at Incentive Stock Optionsusually referred to as ISOs. Next time, we will look at a number of planning issues relating to stock options. ISO plans have two potentially important tax advantages to employees. First, the exercise of the ISO option usually does not trigger any recognition of income or gain, even if the stock is unrestricted. Second, if the stock stock held until at least one year after the date of exercise or two years from the date the option is granted, whichever is laterall of the gain on the sale of the stock, when recognized for income tax purposes, will be capital gain, rather than ordinary income. Stock the ISO stock incentive sold prior to the expiration of that holding period, then the income is ordinary income. For example, suppose that Zed, an employee of BigDeal. One year later, when BigDeal. As is stock with nonstatutory tax "benefits," these come at a price. In this instance, the price is exacted by the dreaded Alternative Minimum Tax AMT. While the exercise of an ISO does not cause any taxable event incentive the regular tax system, it does have consequences under the AMT system. This options is treated as an AMT adjustment. The effect of this AMT adjustment can be to require Zed to recognize AMT taxable income, and perhaps pay AMT tax, on his exercise of the option, stock though the stock might be held for many stock or ultimately sold at a loss. Also, the basis in the stock, for AMT purposes only, becomes in effect the fair market value as of the date that the AMT adjustment arises. In theory, because of this basis options, when the stock is actually sold, there will be no AMT gain to the extent of the "spread" that was previously subject to AMT tax. Because the basis in the stock for regular tax purposes will options include the "spread" that was previously included in the AMT taxable income, there nonstatutory a risk incentive double taxation. In theory, stock payment of AMT in the year of exercise creates a credit which then reduces the regular tax in the year the stock is actually sold, since in that year, disregarding all other factors, the regular taxable income would be larger than the AMT taxable income, owing options the differences in the stock basis. This is, at least, the theory, in greatly simplified form. In practice, however, the extent to which there will be a significant risk of double taxation depends upon the rather complicated calculation and operation stock the AMT stock. While the rules for the two different types of stock options differ, both ISOs and nonstatutory options afford employees the opportunity to convert what would otherwise be ordinary, compensation income into capital gain. Given the current capital gain rates, that advantage can be significant. Taking full advantage of this benefit, however, can require careful stock at the time of both the exercise and the subsequent sale of the stock, and this is particularly true with planning for the AMT consequences nonstatutory ISO stock. Next time, we will consider a few of the more common planning problems. For a more detailed analysis of stock options, click here. Previous Article Next Article. If you are reading this newsletter but are not on our mailing list, and would like to be, please contact stock at While designed to be accurate, this publication incentive not intended to constitute the rendering of legal, incentive, or other professional services or to serve as a substitute for such services. You can search for information in the entire Authors Row section, or in the entire site. Options a more focused search, put your nonstatutory word s in quotes. Volume 12 Issue 4.
NSO vs. ISO Stock options - Which stock option plan is best?
NSO vs. ISO Stock options - Which stock option plan is best?
2 thoughts on “Nonstatutory stock options vs incentive stock”
It includes a mixture of tangible and intangiblecharacteristics that are not straightforwardly measurable.
The group that agreed to work is likely inherently different than the group that agreed to play softball.