CEP Tax Planning & Compliance 2 — Questions and Answers
Question 1: An employee exercises an ISO when the stock FMV is $50 and the exercise price is $20. How much is included in the AMT calculation at exercise?
- $0 — ISOs have no regular tax or AMT consequence at exercise
- $30 per share as an AMT preference item (Correct answer)
- $50 per share as ordinary income
- $20 per share as a capital gain
Correct answer: $30 per share as an AMT preference item
The $30 spread (FMV minus exercise price) is an AMT preference item in the year of ISO exercise, even though no regular income tax is owed.
Question 2: Which holding period requirement must be met for an ISO sale to receive full qualified (long-term capital gain) tax treatment?
- Held at least 6 months from exercise
- Held at least 2 years from grant AND at least 1 year from exercise (Correct answer)
- Held at least 1 year from exercise only
- Held at least 3 years from the grant date
Correct answer: Held at least 2 years from grant AND at least 1 year from exercise
ISO qualified disposition requires holding shares more than 2 years from the grant date AND more than 1 year from the exercise date.
Question 3: When an ISO is disqualified due to a same-day sale (cashless exercise), the spread is treated as:
- Long-term capital gain
- Short-term capital gain
- Ordinary income subject to FICA (Correct answer)
- A preference item subject only to AMT
Correct answer: Ordinary income subject to FICA
A disqualifying disposition converts the ISO spread into ordinary income, which is also subject to FICA (Social Security and Medicare) withholding.
Question 4: For NQSOs, the employer is required to withhold income taxes at exercise on:
- The exercise price paid by the employee
- The full FMV of the shares acquired
- The spread between FMV and exercise price (Correct answer)
- Only the capital gain portion if shares are immediately sold
Correct answer: The spread between FMV and exercise price
NQSO spread (FMV at exercise minus exercise price) is ordinary income subject to federal income tax and FICA withholding.
Question 5: An employee who timely files a Section 83(b) election for restricted stock will recognize income:
- When restrictions lapse
- At the time of vesting
- On the grant date, based on the grant-date FMV (Correct answer)
- When the stock is ultimately sold
Correct answer: On the grant date, based on the grant-date FMV
A Section 83(b) election shifts income recognition to the grant date, taxing the FMV at grant as ordinary income rather than waiting for vesting.
Question 6: If an employee makes a Section 83(b) election and the stock later becomes worthless, the tax result is:
- The ordinary income paid at grant is refunded by the IRS
- The employee can claim a capital loss but cannot recover the ordinary income tax already paid (Correct answer)
- The election is retroactively voided and taxes are recalculated at vesting
- The employee claims an ordinary deduction equal to grant-date FMV
Correct answer: The employee can claim a capital loss but cannot recover the ordinary income tax already paid
The 83(b) election is irrevocable; if stock becomes worthless, the employee realizes a capital loss but cannot recover the ordinary income taxes already paid on grant-date value.
Question 7: Under IRC Section 162(m), which type of executive compensation is NOT subject to the $1 million deductibility cap for public companies?
- Base salary paid to the CEO
- Non-performance-based bonuses
- Previously grandfathered performance-based awards under pre-2018 law (transition relief) (Correct answer)
- RSU income for the CFO
Correct answer: Previously grandfathered performance-based awards under pre-2018 law (transition relief)
The Tax Cuts and Jobs Act of 2017 eliminated the performance-based exception, but awards with binding written contracts in place before November 2, 2017 may qualify for transition relief.
CEP Tax Planning & Compliance 2
An employee exercises an ISO when the stock FMV is $50 and the exercise price is $20.
How much is included in the AMT calculation at exercise?