exercise of ISO option

[taxbrewster]

hello everyone - just had this walk into my office.

just need some clarification on what I believe I am doing....correct or not.

Form 3921

Date Option Granted - 3/16/11

Date Option Exercised - 7/23/13

Exercise price per share - .01

FMV on exercise date - 1.85

# of shares - 78125

So, no sale as of yet but after reading materials and the board.

I am reporting this on the 6251

LN14 -

FMV at date of ex - $144,531

Stock purchase price at exercise of option - $781 ---- > confused - exercise price? (.01) OR am I missing information?? I feel like I should be using a different price??

Total adjustment for ISO options - $143,750

Because if I use the above calculation t/p get hammered with $37K of AMT.

Thanks!!!

[Catherine]

ISOs are odd beasts.

NO income included when option is granted; when option is exercised; and no payroll taxes are assessed.

ISOs get reported on Form 3921 (lucky you, it seems your client gave that to you).

When the stock is eventually sold, the difference between amount paid and sale price is capital gain or loss.

Nothing earth-shattering so far.

When an ISO is exercised and sold within the same tax year, there is NO AMT preference.

When an ISO is exercised and held to a future year, any excess of the sock's FMV over the option price must be added to the AMT taxable income for that year.

There is an AMT basis adjustment that piggybacks on this.

But if your client did not SELL that stock the same year (ad it sounds like he did not), then you have no AMT taxable income until the year of sale. Warning him about this future concern may help him decide how much to sell and when.

Good luck!

[Kea]

Where did you find the part about no AMT taxable income if stocks not sold in the same year? I don't see that in QuickFinders.

In my tax class (never had a real world ISO cause AMT to be owed), they told us of all the cases of tech employees exercising ISOs and paying huge amounts of AMT. Then the tech bubble burst and stock price plummeted. Yes, they got the basis increase, but now they had capital losses of tens of thousands of dollars and they could only use $3000 / year. A few years ago, the rules changed where you could claim some (all?) of that. I don't remember the details because it never applied to my clients. Perhaps this law is what changed the AMT reporting?

[JMovichEA]

I cant remember the details, it's been a few years back since I've handled one of these, but I thought the ISO triggered AMT, but for later year(s) there was an AMT credit to offset. (form 8801)

[taxbrewster]

Thanks for the input.

"When an ISO is exercised and held to a future year, any excess of the sock's FMV over the option price must be added to the AMT taxable income for that year.

There is an AMT basis adjustment that piggybacks on this.

But if your client did not SELL that stock the same year (ad it sounds like he did not), then you have no AMT taxable income until the year of sale. Warning him about this future concern may help him decide how much to sell and when."

Question about your comments - The t/p did not sell and his holding them. What is the AMT basis adjustment that piggybacks on this?

If I am understanding this correctly - then really there is nothing that needs to be reported until sale. Correct?

[JMovichEA]

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If I am understanding this correctly - then really there is nothing that needs to be reported until sale. Correct?

I'm not sure right now, but I think there may be AMT consequences.

[cred65]

Go to line 14, Form 6251.

Click on line and the Worksheet will display;

Ln 1 Fair Market Value date of exercise. $144,531

Ln 2 Stock purchase price at exercise of option. $781.

The software will compute the rest of the transaction and AMT.

[Catherine]

I copied what I posted directly from a continuing ed class I took about a year ago, specifically on the tax treatment of ESPPs, ISOs, and RSUs, presented by a specialist in those areas. I have referred to that book and its worksheets dozens of times.

No AMT income until the year the stock is sold. For ISOs only. ESPPs and RSUs get different treatment. Half the battle, sometimes, is figuring out *which* of these you have from the paperwork presented.

Got some this year with the option grant and exercise dates complete gibberish -- and I mean gibberish; one date was given as 8./00/3772. With the period after the 8.

[JMovichEA]

Your class differs from classes I've taken on this, but it's been several years. In any event I recommend doing some research on this before the return is signed off.

[Kea]

The basis adjustment means that if you have to pay the ATM in the year exercised, the basis becomes $144,531, and capital gain / loss is calculated from there. If no AMT, basis is $781.

[JMovichEA]

some info here:

http://fairmark.com/execcomp/isoexer.htm

[joanmcq]

If you pay AMT in the year exercised, then your basis for AMT & regular tax are different. So when you sell in another year, you'll have a negative adjustment in the 6251 instead of positive. Also the possibility of a credit on the 8801.

There was only one year when the AMT credit was made refundable, for all of those techies that got caught with huge credits but no AMT to use it up against. The AMT credit is an odd puppy, it's not one that can be taken against regular tax, just AMT.

There is an election you can make in the year of exercise; I believe it is to treat all of the spread as ordinary income as to not run into issues with AMT, negative adjustments and credits that are useless unless you are in AMT in the future as well.

[taxbrewster]

Thank you all for the information....very helpful as always...