CPA · Question 01 · Area I: Individual Compliance and Planning
In Year 1, an executive exercises Incentive Stock Options (ISOs) to purchase 1,000 shares of company stock at a strike price of $10 per share when the fair market value is $50 per share. The executive holds the stock through the end of Year 1. For regular tax purposes, no income is recognized in Year 1. Which of the following correctly describes the Alternative Minimum Tax (AMT) implication for Year 1?
Answer options:
No AMT adjustment is required because the stock was not sold in Year 1.
The executive must include a $40,000 positive adjustment in calculating Alternative Minimum Taxable Income (AMTI).
The executive recognizes $40,000 of ordinary income for regular tax purposes, so no AMT adjustment is needed.
The executive has a $40,000 negative adjustment for AMT purposes to defer the gain.
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