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Employee Stock Purchase Plans (ESPPs) Flashcards

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Read the first 7 Employee Stock Purchase Plans (ESPPs) flashcards as text

  1. For a Section 423 ESPP, what is the required holding period from the date of grant (offering date) to achieve a qualifying disposition?

    Answer: 2 years

    To qualify for favorable tax treatment, shares must be held for more than two years from the offering (grant) date.

  2. In addition to the holding period from the offering date, what is the required holding period from the purchase date for a qualifying disposition under Section 423?

    Answer: 1 year

    Shares must also be held for more than one year from the purchase date; both tests must be satisfied for a qualifying disposition.

  3. In a qualifying disposition of Section 423 ESPP shares purchased at a 15% discount with a look-back, how is the ordinary income component calculated?

    Answer: The lesser of the actual gain on sale or the discount from FMV at the offering date

    In a qualifying disposition, ordinary income equals the lesser of (a) the actual gain realized or (b) the discount from the FMV at the start of the offering period.

  4. What happens to any gain above the ordinary income component in a qualifying disposition of ESPP shares?

    Answer: It is treated as long-term capital gain

    The gain in excess of the ordinary income amount in a qualifying disposition is treated as long-term capital gain, receiving preferential tax rates.

  5. Which IRS form must an employer file to report the transfer of stock acquired through a Section 423 ESPP?

    Answer: Form 3922

    Employers must file Form 3922 (Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)) when ESPP shares are first transferred.

  6. In a disqualifying disposition of Section 423 ESPP shares, how is the ordinary income amount determined?

    Answer: The FMV of the shares on the purchase date minus the amount paid

    In a disqualifying disposition, ordinary income equals the spread at exercise — the FMV on the purchase date minus what the employee actually paid.

  7. When an employee sells ESPP shares in a disqualifying disposition at a price LOWER than the FMV on the purchase date, what is the ordinary income recognized?

    Answer: The difference between the FMV at purchase and the purchase price, limited to the actual gain

    Ordinary income in a disqualifying disposition is the lesser of the spread at purchase or the actual gain; if sold below FMV at purchase, the ordinary income is capped at the actual gain.