Your Checklist Related to Incentive Stock Options That Will Help You Make Informed Decisions

Incentive Stock Options (ISO) equip employees with more favourable tax benefits than non-qualified stock options. An individual who exercises a non-qualified stock option must pay required income taxes on the excess of the fair market value of the underlying shares.

An employee is subjected to no income tax at grant or on the exercise of an ISO and the profit acquired made on the sale of the shares is taxed as long-term capital gain.

From the employer’s perception, ISO is less beneficial than non-qualified employee stock options, because the employer is not entitled to a tax deduction on an employee's exercise of an ISO if the employee meets the above holding necessities.

Given below is a guide on checklist that defines the qualification of an option as an ISO. You must create a checklist of following aspects to understand ISO better:

• The terms of the option must not reflect that the option will not be served as an ISO.
• The option must be given to an individual in connection with that person's employment by the corporation that is supposed to grant the option.
• The option must be for the purchase of stock of the employer or a related enterprise.
• The shareholders must grant the option within 12 months before or after the date the plan is selected by the corporation. Not only this, it must be granted under a formal plan which may be either written or present in electronic form.
• The plan under which the ISO is granted must cover the things which are given below:

1. The maximum number of shares which may be issued through the exercise of ISOs.
2. The potential employees who are eligible to receive options or other stock-based benefits under the plan (and if non-employees become eligible to acquire awards under the plan, the plan must specifically indicate the employees or class of employees eligible to receive ISOs).

• The option must be granted within ten years from the earlier of: the date the plan was chosen; or the date the plan was sanctioned by shareholders.
• The regulations of the option must indicate that the option is not exercisable beyond ten years after the date the option was granted (or five years after the option was granted to an employee who has shares accounting for 10% or more of the total combined voting power of all classes of stock of the company, its parent or its subsidiary (10% shareholder)).
• The exercise price of the option must not be less than

1. The reasonable market value of the implicit shares on the grant date for employees who are not 10% shareholders; or
2. 110% of the fair market value of the underlying shares on the grant date for employees who are 10% shareholders.

• The terms of the option must include:

1. Prohibition of transfer of the option by the employee, other than by will or the laws of descent and distribution.
2. Gives the liberty of exercising the option only by the employee.

Keeping these aspects in mind and the exercise stock options tax rules and conditions, you should be able to make the most of your options for befitting return on investment.

If you are in doubt or are not certain how to utilise the opportunities related to your employee stock options, taxation issues associated with them then it is better to consult a financial professional in the domain.

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