TCP EXAM (CPA) STUDY QUESTIONS
AND ANSWERS
What are stock options? - ANSWER-An incentive mechanism to align the
interests of shareholders and managers, by giving the recipient the right (but
not the obligation) to buy a company's stock at a predetermined price
sometime in the future
What is restricted stock? - ANSWER-Stock is given to an employee but they
can't do anything with it until they spend a certain amount of time with the
company
What are Stock Appreciation Rights (SARs)? - ANSWER-The employee is not
given shares, but they have the right to compensation for the increase in the
share's value
Grant Date - ANSWER-When the employee receives the award
Vesting Date - ANSWER-When the employee has the right to exercise the
equity award (restrictions lapse)
Exercise Date - ANSWER-When the employee purchases stock using stock
options or cashes out SARs
Sale Date - ANSWER-When the employee sells restricted stock or stock
acquired using stock options
Expiration Date - ANSWER-When the rights under the equity award lapse, or
expire, unused
What are the 2 types of employee stock options? - ANSWER-1) Nonstatutory
(nonqualified)
2) Statutory (qualified: ISOs and ESPPs)
When does a stock have a readily determinable value? - ANSWER-1) When
it's traded on an established market, or
2) Meets ALL of the following conditions:
-Option is transferable
-Option is exercisable immediately in full when it's granted
,-There are no conditions or restrictions that would have a significant effect on
the value
-The fair value of the option privilege can be readily determined
What type of income does an employee recognize for a nonstatutory stock
option with a readily determinable value? - ANSWER-Ordinary compensation
income (value of the option minus the cost)
-Note that any future sale of the stock could result in a capital gain or loss
What is the basis and holding period of a nonstatutory stock option with a
readily determinable value? - ANSWER-Basis: exercise price plus any amount
previously taxed on the date of grant
Holding Period: begins with the exercise date
What happens if an employee allows a nonstatutory stock option with a
readily determinable value to lapse? - ANSWER-There is a capital loss based
on the value of the options previously taxed
What is the basis and holding period of a nonstatutory stock option without a
readily determinable value? - ANSWER-Basis: the FMV of the stock when the
stock option was exercised plus previous taxable income
Holding Period: begins with the exercise date
When is a nonstatutory stock option without a readily determinable value
taxed? - ANSWER-Taxed on the exercise date
-Taxed on the difference between the exercise price and the FMV on the
exercise date
What happens if an employee allows a nonstatutory stock option without a
readily determinable value to lapse? - ANSWER-The employee can deduct a
capital loss equal to the price, if any, that the employee paid for the options
What are 7 key points relating to Incentive Stock Options (ISOs)? - ANSWER-A
type of statutory stock option
1) The exercise price may not be less than the FMV of the stock at the
GRANT date
2) Once exercised, the stock must be held for at least 2 years after the grant
date AND at least 1 year after the exercise date
3) The options must be exercisable within 10 years of the grant date
,4) An employee may exercise up to $100,000 of ISOs in a year (excess
amount will be treated as a nonstatutory option)
5) The employee must remain an employee of the corporation from the
option's grant date until 3 months (1 year if due to permanent and total
disability) before the option is exercised
6) The employee may not owe more than 10% of the combined voting power
as of the grant date
7) The ISO must be granted under a written plan document and approved by
shareholders
What are the 8 key points relating to Employee Stock Purchase Plans
(ESPPs)? - ANSWER-A type of statutory stock option
1) The exercise price may not be less than the lesser of 85% of the FMV of
the stock at the grant OR exercise date
2) Once exercised, the stock must be held for at least 2 years after the grant
date AND at least 1 year after the exercise date
3) The options must be exercisable within 27 months of the grant date
4) An employee can only acquire the right to purchase up to $25,000 of stock
per year
5) The employee must remain an employee of the corporation from the
option's grant date until 3 months (1 year if due to permanent and total
disability) before the option is exercised
6) The employee may not owe more than 5% of the combined voting power
as of the grant date
7) The ESPP must be granted under a written plan document and approved
by shareholders
8) The plan must be available to all full-time employees other than highly
compensated employees and those with less than 2 years of employment
How are gains/losses classified for statutory stock options? - ANSWER-If the
two/one year holding requirements are satisfied, then then the gain/loss is
capital.
, If the two/one year holding requirements are not satisfied, then any gain is
ordinary up to the lesser of the difference between the exercise price and the
stock's FMV on the exercise (OR GRANT) date. Any excess gain is capital
gain. Any loss is a capital loss.
What happens if statutory stock options lapse? - ANSWER-No deduction is
available as the option was not taxed as income in the first place (a loss may
occur if any amount was paid for the option itself)
What is the excess of the FMV of the stock on the exercise date over the
exercise price treated as? - ANSWER-A preference item for Alternative
Minimum Tax (this is a bargain purchase)
How is restricted stock taxed? - ANSWER-Recognized as compensation
income for the FMV of the stock on the vesting date
What is the basis and holding period for restricted stock? - ANSWER-Basis:
The FMV on the vesting date
Holding Period: begins on the vesting date
What is an 83(b) election? - ANSWER-An employee may elect to recognize
ordinary compensation income for the FMV of the RESTRICTED stock on the
GRANT date (rather than vest date)
-Must be made within 30 days of the date the restricted stock award is
granted and is irrevocable
-Not available for Restricted Stock Units (RSUs)
What are Restricted Stock Units (RSUs) and how are they treated for tax
purposes? - ANSWER-Not actual shares of employer stock, but rather a
promise to give an employee a specified number of unrestricted shares of
employee stock on the vesting date
-Employees recognize ordinary compensation income for the FMV of the
stock on the vesting date, just like restricted stock
How are Stock Appreciation Rights (SARs) treated for tax purposes? -
ANSWER-Employee recognized ordinary compensation income for the
amount of the cash payment when the SAR is exercised
How are below-market-rate loans treated? - ANSWER-The taxpayer may have
to report any foregone interest as interest income/deduction
AND ANSWERS
What are stock options? - ANSWER-An incentive mechanism to align the
interests of shareholders and managers, by giving the recipient the right (but
not the obligation) to buy a company's stock at a predetermined price
sometime in the future
What is restricted stock? - ANSWER-Stock is given to an employee but they
can't do anything with it until they spend a certain amount of time with the
company
What are Stock Appreciation Rights (SARs)? - ANSWER-The employee is not
given shares, but they have the right to compensation for the increase in the
share's value
Grant Date - ANSWER-When the employee receives the award
Vesting Date - ANSWER-When the employee has the right to exercise the
equity award (restrictions lapse)
Exercise Date - ANSWER-When the employee purchases stock using stock
options or cashes out SARs
Sale Date - ANSWER-When the employee sells restricted stock or stock
acquired using stock options
Expiration Date - ANSWER-When the rights under the equity award lapse, or
expire, unused
What are the 2 types of employee stock options? - ANSWER-1) Nonstatutory
(nonqualified)
2) Statutory (qualified: ISOs and ESPPs)
When does a stock have a readily determinable value? - ANSWER-1) When
it's traded on an established market, or
2) Meets ALL of the following conditions:
-Option is transferable
-Option is exercisable immediately in full when it's granted
,-There are no conditions or restrictions that would have a significant effect on
the value
-The fair value of the option privilege can be readily determined
What type of income does an employee recognize for a nonstatutory stock
option with a readily determinable value? - ANSWER-Ordinary compensation
income (value of the option minus the cost)
-Note that any future sale of the stock could result in a capital gain or loss
What is the basis and holding period of a nonstatutory stock option with a
readily determinable value? - ANSWER-Basis: exercise price plus any amount
previously taxed on the date of grant
Holding Period: begins with the exercise date
What happens if an employee allows a nonstatutory stock option with a
readily determinable value to lapse? - ANSWER-There is a capital loss based
on the value of the options previously taxed
What is the basis and holding period of a nonstatutory stock option without a
readily determinable value? - ANSWER-Basis: the FMV of the stock when the
stock option was exercised plus previous taxable income
Holding Period: begins with the exercise date
When is a nonstatutory stock option without a readily determinable value
taxed? - ANSWER-Taxed on the exercise date
-Taxed on the difference between the exercise price and the FMV on the
exercise date
What happens if an employee allows a nonstatutory stock option without a
readily determinable value to lapse? - ANSWER-The employee can deduct a
capital loss equal to the price, if any, that the employee paid for the options
What are 7 key points relating to Incentive Stock Options (ISOs)? - ANSWER-A
type of statutory stock option
1) The exercise price may not be less than the FMV of the stock at the
GRANT date
2) Once exercised, the stock must be held for at least 2 years after the grant
date AND at least 1 year after the exercise date
3) The options must be exercisable within 10 years of the grant date
,4) An employee may exercise up to $100,000 of ISOs in a year (excess
amount will be treated as a nonstatutory option)
5) The employee must remain an employee of the corporation from the
option's grant date until 3 months (1 year if due to permanent and total
disability) before the option is exercised
6) The employee may not owe more than 10% of the combined voting power
as of the grant date
7) The ISO must be granted under a written plan document and approved by
shareholders
What are the 8 key points relating to Employee Stock Purchase Plans
(ESPPs)? - ANSWER-A type of statutory stock option
1) The exercise price may not be less than the lesser of 85% of the FMV of
the stock at the grant OR exercise date
2) Once exercised, the stock must be held for at least 2 years after the grant
date AND at least 1 year after the exercise date
3) The options must be exercisable within 27 months of the grant date
4) An employee can only acquire the right to purchase up to $25,000 of stock
per year
5) The employee must remain an employee of the corporation from the
option's grant date until 3 months (1 year if due to permanent and total
disability) before the option is exercised
6) The employee may not owe more than 5% of the combined voting power
as of the grant date
7) The ESPP must be granted under a written plan document and approved
by shareholders
8) The plan must be available to all full-time employees other than highly
compensated employees and those with less than 2 years of employment
How are gains/losses classified for statutory stock options? - ANSWER-If the
two/one year holding requirements are satisfied, then then the gain/loss is
capital.
, If the two/one year holding requirements are not satisfied, then any gain is
ordinary up to the lesser of the difference between the exercise price and the
stock's FMV on the exercise (OR GRANT) date. Any excess gain is capital
gain. Any loss is a capital loss.
What happens if statutory stock options lapse? - ANSWER-No deduction is
available as the option was not taxed as income in the first place (a loss may
occur if any amount was paid for the option itself)
What is the excess of the FMV of the stock on the exercise date over the
exercise price treated as? - ANSWER-A preference item for Alternative
Minimum Tax (this is a bargain purchase)
How is restricted stock taxed? - ANSWER-Recognized as compensation
income for the FMV of the stock on the vesting date
What is the basis and holding period for restricted stock? - ANSWER-Basis:
The FMV on the vesting date
Holding Period: begins on the vesting date
What is an 83(b) election? - ANSWER-An employee may elect to recognize
ordinary compensation income for the FMV of the RESTRICTED stock on the
GRANT date (rather than vest date)
-Must be made within 30 days of the date the restricted stock award is
granted and is irrevocable
-Not available for Restricted Stock Units (RSUs)
What are Restricted Stock Units (RSUs) and how are they treated for tax
purposes? - ANSWER-Not actual shares of employer stock, but rather a
promise to give an employee a specified number of unrestricted shares of
employee stock on the vesting date
-Employees recognize ordinary compensation income for the FMV of the
stock on the vesting date, just like restricted stock
How are Stock Appreciation Rights (SARs) treated for tax purposes? -
ANSWER-Employee recognized ordinary compensation income for the
amount of the cash payment when the SAR is exercised
How are below-market-rate loans treated? - ANSWER-The taxpayer may have
to report any foregone interest as interest income/deduction
