Tax Planning & Compliance Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Tax Planning & Compliance flashcards as text
An employee exercises an ISO when the stock FMV is $50 and the exercise price is $20. How much is included in the AMT calculation at exercise?
Answer: $30 per share as an AMT preference item
The $30 spread (FMV minus exercise price) is an AMT preference item in the year of ISO exercise, even though no regular income tax is owed.
Which holding period requirement must be met for an ISO sale to receive full qualified (long-term capital gain) tax treatment?
Answer: Held at least 2 years from grant AND at least 1 year from exercise
ISO qualified disposition requires holding shares more than 2 years from the grant date AND more than 1 year from the exercise date.
When an ISO is disqualified due to a same-day sale (cashless exercise), the spread is treated as:
Answer: Ordinary income subject to FICA
A disqualifying disposition converts the ISO spread into ordinary income, which is also subject to FICA (Social Security and Medicare) withholding.
For NQSOs, the employer is required to withhold income taxes at exercise on:
Answer: The spread between FMV and exercise price
NQSO spread (FMV at exercise minus exercise price) is ordinary income subject to federal income tax and FICA withholding.
An employee who timely files a Section 83(b) election for restricted stock will recognize income:
Answer: On the grant date, based on the grant-date FMV
A Section 83(b) election shifts income recognition to the grant date, taxing the FMV at grant as ordinary income rather than waiting for vesting.
If an employee makes a Section 83(b) election and the stock later becomes worthless, the tax result is:
Answer: The employee can claim a capital loss but cannot recover the ordinary income tax already paid
The 83(b) election is irrevocable; if stock becomes worthless, the employee realizes a capital loss but cannot recover the ordinary income taxes already paid on grant-date value.
Under IRC Section 162(m), which type of executive compensation is NOT subject to the $1 million deductibility cap for public companies?
Answer: Previously grandfathered performance-based awards under pre-2018 law (transition relief)
The Tax Cuts and Jobs Act of 2017 eliminated the performance-based exception, but awards with binding written contracts in place before November 2, 2017 may qualify for transition relief.