Question

In 2012, Lance was granted 2,000 stock options by his employer, Lynn Corporation. Each option allowed Lance to purchase one share of Lynn Corporation stock for $18 per share. On the date the options were granted to Lance in 2012, The Lynn Corporation stock was selling for $16 per share. In 2015, when the Lynn Corporation stock was selling for $39 per share, Lance exercised his options and purchased 2,000 shares of Lynn Corporation. In 2017, Lance sold his Lynn Corporation stock for $36 per share.

a) What are the federal income tax consequences to Lance and Lynn Corporation in 2012, 2015 and 2017 if the Lynn Corporation options granted to Lance were qualified incentive stock options (ISOs)? You may ignore alternative minimum tax (AMT) for this question. Please provide the calculations.

b) What are the federal income tax consequences to Lance and Lynn Corporation in 2012, 2015 and 2017 if the Lynn Corporation options granted to Lance were nonqualified stock options (NQSOs) You may ignore alternative minimum tax (AMT) for this question. Please provide the calculations.

Answer 1

a) In case of qualified incentive stock options (ISOs) ( ignoring the Alternative Minimum Tax) nothing would be the tax consequences either for the employer or employee for the years of 2012 and 2015.But in the year of stock sale ie 2017 the tax consequence for the employee is " the difference between selling price of the stock and its purchase price is taxable as a capital gain" ie[( $36-$18)* 2000= $36000 ] and nothing would be the effect for employer

b) In case of nonqualified stock options (NQSOs)

In the year of 2015,option exercised by the employee The spread between the exercise price and fairmarket value is included in the income of the employee and to the extent treated as expense by the employer and taxable at ordinary tax rates ie.,($39-18=$21*2000=$42000) and in 2017 the didfference between the cost basis ie FV of stock and selling price ($39-36=$3) is treated as a capital loss for the employee