Mark received 10 ISOs at the time he started working for Hendricks Corporation f

Question

Mark received 10 ISOs at the time he started working for Hendricks Corporation five years ago when Hendricks’s price was $4 per share (each option gives him the right to purchase 10 shares of Hendricks Corporation stock for $8 per share). Now that Hendricks’s share price is $35 per share, he intends to exercise all options and hold all of his shares for more than year. Assume that more than a year after exercise, Mark sells the stock for $35 a share. What are Mark’s tax consequences on the date he sells the shares assuming his ordinary marginal rate is 30 percent and his long-term capital gains rate is 15 percent? (Ignore AMT consequences)

Explanation / Answer

Mark has no tax consequences on the grant date

Mark has no regular income tax consequences on the exercise date, but recognizes $3,000 for AMT, the calculations are as follows:

Description

Amount

explanation

1)shares acquired

120

10*(8+4)

2)exercise price

$8

3)cash needed to exercise

$960

(1)*(2)

4)market price

$35

5)market value of shares

$4200

(1)*(4)

6)bargain element(AMT PREFERENCE)

$3240

(5)-(3)

The bargain element is includable in AMTI ,which may cause mark to pay AMT

7)shares acquired with NQOs

120

1

8)market price at sale

$35

9)amount realised

$4200

(7)*(3)

10)basis

$960

(3)above

11)long term capital gain

$3240

(9)-(10)

12)marginal rate

15%

TAXdue in the year of sale

$486

(11)*(12)

Description

Amount

explanation

1)shares acquired

120

10*(8+4)

2)exercise price

$8

3)cash needed to exercise

$960

(1)*(2)

4)market price

$35

5)market value of shares

$4200

(1)*(4)

6)bargain element(AMT PREFERENCE)

$3240

(5)-(3)

The bargain element is includable in AMTI ,which may cause mark to pay AMT

7)shares acquired with NQOs

120

1

8)market price at sale

$35

9)amount realised

$4200

(7)*(3)

10)basis

$960

(3)above

11)long term capital gain

$3240

(9)-(10)

12)marginal rate

15%

TAXdue in the year of sale

$486

(11)*(12)

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