Question

At vest date, Incentive Stock Options create a ___________ whereas Non-qualified Stock Options create a ___________ for the employer under GAAP.

unfavorable permanent difference; deferred tax liability

unfavorable permanent difference; deferred tax asset

favorable permanent difference; deferred tax liability

favorable permanent difference; deferred tax asset

Answer 1

Answer. Option D is correct answer.

A non-qualified stock option (NQSO) is a type of stock option that does not qualify for special favorable tax treatment under the US Internal Revenue Code. Thus the word nonqualified applies to the tax treatment (not to eligibility or any other consideration). NQSOs are the most common form of stock option and may be granted to employees, officers, directors, contractors, and consultants.

You pay taxes on these options at the time of exercise. For tax purposes, the exercise spread is compensation income and is therefore reported on your IRS Form W-2 for the calendar year of exercise.

Incentive stock options (ISOs) qualify for special tax treatment under the Internal Revenue Code and are not subject to Social Security, Medicare, or withholding taxes. However, to qualify they must meet rigid criteria under the tax code. ISOs can be granted only to employees, not to consultants or contractors. There is a $100,000 limit on the aggregate grant value of ISOs that may first become exercisable (i.e. vest) in any calendar year. Also, for an employee to retain the special ISO tax benefits after leaving the company, the ISOs must be exercised within three months after the date of termination.

Nonqualified stock options (NQSOs).

This creates a deferred tax assetbecause the company is taking a financial statement deduction that isnot currently deductible for income taxpurposes. ... Companies should notexpect the deferred tax asset to equal the tax benefit they ultimately receive.