Question

Accounting Question

An employer has heard mixed reviews with respect to how effective ISOs are in terms of motivating employees but she tells you that she would like to try them and wants to grant some ISOs to her most trusted employee, Susan. With your help, Susan is granted ISOs on 500 shares of KPI stock on September 15, 2019 with an exercise price of $7 a share, equal to the fair market value of the stock on September Susan vests in the right to exercise the options on the anniversary date of the grant at the rate of 100 shares a year each year over the next 5 years. Assume that Susan exercises the 200 options in which she is vested on March 15, 2022 when the fair market value is $10/share, and she sells all 200 of the shares for $12/share on December 31, 2022.

a. Can Susan make a section 83(b) election with respect to the options themselves? In other words, can she elect to include the value of the options in her income on the date of grants and thereby avoid any tax consequences on date of exercise? Cite authority in either the code or regulations for your answer, if there is any authority.

b. What are the tax consequences to both Susan to KPI to September 15, 2019, September 15, 2020, September 15, 2021, March 15, 2022 and December 31, 2022?

Answer 1

a. Section 83b gives an employee the option to pay taxes on the total fair market value at the time of granting which is $12/ share in Susan's case

b.