When Nonqualified Stock Options Have a Leg Up
March 30, 2014 | Business Plans, Financial Planning, Tax Planning
Incentive stock options offer tax advantages to employees, but they come with a tax price for your Maine-based company. The plan must meet numerous strict requirements spelled out in the law, and the company gets no deduction at any time. To receive preferential capital gain treatment, option holders must retain the stock at least two years after receiving the option and one year after exercising it.
On the other hand, nonqualified stock options come with a lot less restrictions. Your business simply grants the options at a fixed price to a select group of employees. As the employees exercise the options, the company claims a tax deduction for the difference between the fair market value and the exercise price. Of course, this amount is also taxable to the employees.
With an incentive stock option, the exercise price cannot be lower than the fair market value of the stock when the option is issued. There is no such restriction on nonqualified options.
Filler & Associates can help you compare the differences between nonqualified options and incentive stock options. You may be surprised at the result.