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US Rules For Incentive Stock Options Finalized

by Glen Shapiro, LawAndTax-News.com, New York

04 August 2004

The US Treasury Department and the Internal Revenue Service on Monday issued regulations on incentive stock options (ISOs) which finalize, with some changes, regulations proposed in 2003.

ISOs provide employees with the ability to acquire employer stock without realizing income when the option is exercised. If the employee holds the stock for a required period, any gains on the sale of the stock are capital gains. The exercise price for an ISO must be no less than the fair market value of the underlying stock on the date the ISO is granted.

In addition, an ISO plan must be approved by shareholders, and the amount of ISOs that can be granted to an employee is limited. If the employee meets the holding period requirements for capital gains treatment on the sale of the stock, the employer is not entitled to a deduction with respect to the ISO.

The final regulations include a number of minor changes from the proposed regulations put forward last year. These include revisions to the rules regarding maximum aggregate number of shares in an ISO plan, substitution and assumption of ISOs and modification of ISOs.

The final regulations are intended to come into force on the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least 6 months after the publication of the final regulations.

The full text of the final regulations on incentive stock options can be found in the Tax-News Resources section.

 

 






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