CEP Tax Planning & Compliance 2

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?

Accepted Answer

$30 per share as an AMT preference item

Answer

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?

Accepted Answer

Held at least 2 years from grant AND at least 1 year from exercise

Answer

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:

Accepted Answer

Ordinary income subject to FICA

Answer

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:

Accepted Answer

The spread between FMV and exercise price

Answer

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:

Accepted Answer

On the grant date, based on the grant-date FMV

Answer

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.

(CEP) Certified Equity Professional Practice Test