CPM Executive Compensation & Equity Plans

Question 1

Which type of stock option allows employees to potentially avoid ordinary income tax at exercise if statutory holding requirements are met?

Accepted Answer

Incentive stock options (ISOs)

Answer

Incentive stock options (ISOs) allow employees to defer income recognition until sale and qualify for capital gains treatment if both holding period requirements are met.

Question 2

When an employee exercises a non-qualified stock option (NQSO), the spread between the exercise price and fair market value is treated as:

Accepted Answer

Ordinary income subject to federal income tax and FICA withholding

Answer

The spread on NQSO exercise is ordinary compensation income subject to federal income tax withholding and FICA taxes in the year of exercise.

Question 3

Restricted Stock Units (RSUs) are generally recognized as taxable income to the employee at:

Accepted Answer

Vesting date

Answer

RSUs are taxable as ordinary compensation income at the vesting date, when restrictions lapse and the employee has an unrestricted right to the shares.

Question 4

For Incentive Stock Options (ISOs), which item is a preference item for Alternative Minimum Tax (AMT) purposes in the year of exercise?

Accepted Answer

The spread between the exercise price and FMV at exercise

Answer

The spread between the exercise price and FMV at exercise is an AMT preference item for ISOs, potentially triggering AMT even though no regular income tax is owed at exercise.

Question 5

Under IRC Section 83(b), an employee who receives restricted stock (not RSUs) may elect to:

Accepted Answer

Recognize income at the grant date based on current FMV rather than waiting until vesting

Answer

A Section 83(b) election accelerates income recognition to the grant date (when FMV may be lower), potentially converting future appreciation to capital gain treatment.

(CPM) Certified Payroll Manager Practice Test

(CPM) Certified Payroll Manager Practice Test

CPM Executive Compensation & Equity Plans