Question 1

In Year 1, an executive is granted an Incentive Stock Option (ISO) to purchase 1,000 shares of company stock at an exercise price of $10 per share (the fair market value on the grant date). In Year 3, when the stock is worth $25 per share, the executive exercises the option. In Year 5, the executive sells the stock for $40 per share. Assume the executive meets all holding period requirements for ISO treatment. What are the regular tax and Alternative Minimum Tax (AMT) implications in Year 3 (the year of exercise)?

Accepted Answer

Identify the type of option (ISO vs NSO). Recall that ISO exercise is a non-event for regular tax (unless disqualified) but creates an AMT adjustment equal to the bargain element (FMV - Strike Price).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing ISOs with NSOs; forgetting the AMT implication of ISOs; calculating the spread using the grant date value instead of exercise date value.

How to approach this question

Full Answer

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Practice the full CPA TCP Practice Exam 5

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