Question

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $35 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $35 per share. Yost exercises all of his options when the share price is $70 per share. Two years after acquiring the shares, he sold them at $107 per share. (Input all amounts as positive values.

What are Yost’s amount of income/gain recognized and amount of taxes payable on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

Answer 1

Yost's total income recognized from NQOs exercised is $105,000 with taxes of $36,750. From the sale of shares, the capital gain is $111,000 with $16,650 in taxes. No income or tax occurs at the grant date.

Step-by-step explanation:

To calculate Yost's income/gain recognized and taxes payable, we need to consider the grant date, exercise date, and sale date of the non-qualified stock options (NQOs). On the grant date, there is no taxable event, so the income recognized and taxes are both $0.

On the exercise date, Yost exercises his NQOs when the share price is $70. Each option allows for the purchase of 10 shares at $35, which is the exercise price. So Yost exercises 300 options for 3,000 shares (300*10). The bargain element (market price - exercise price) per share is $35 ($70-$35). The total income recognized is the bargain element times the number of shares, which is $35 * 3,000 = $105,000. Assuming an ordinary tax rate of 35%, the taxes payable are $105,000 * 35% = $36,750.

Two years later, Yost sells the shares at $107 each. The capital gain per share is $107 - $70 = $37. The total capital gain is $37 * 3,000 = $111,000. With a long-term capital gains tax rate of 15%, the taxes on the sale would be $111,000 * 15% = $16,650.

Yost's total income recognized is $105,000 at exercise and $111,000 at sale; total taxes are $36,750 at exercise and $16,650 at sale.