Non-Qualified Stock Options (NQSOs)

Non-qualified stock options are a popular form of equity compensation that provides a mechanism by which to provide capital accumulation, with deferred tax consequences. 

Key Provisions

• Employee may buy stock at a specified price for a given period of time, typically ten years.
  
• Option price may be below Fair Market Value.
  
• Tremendous flexibility in design of option plan.
  
• Does not satisfy conditions of IRS Code for preferential tax treatment.
  

Tax Impact on Employee

• At grant - no tax.
  
• At exercise - appreciation from grant price taxed as ordinary income.
  
• At sale - capital gains treatment on additional appreciation from date of exercise.
  
• Total tax liability varies depending on tax bracket and state.
  
• Pay tax if grant price is lower than FMV.
  
• If options are discounted, difference is a payroll tax.
  

Tax Impact on Company

• At grant - no tax deduction.
  
• At exercise - company receives tax deduction equal to employee's ordinary income.
  
• At sale - no tax deduction.
  
• Company takes accounting charge to earnings on difference if option price is below Fair Market Value
  

Advantages

• No charge to earnings (unless below Fair Market Value).
  
• Company receives tax deduction.
  
• Long exercise period allows executive flexibility and can be retentive.
  
• No limitations on the amount that may be exercised. 
  
• Provide tangible awards without using liquid resources.
  
• Opportunity to share in the future growth of the Company.
  

Disadvantages

• Executive investment required.
  
• Executive incurs tax liability at exercise.
  
• Dilutes EPS.
  

To find out more about how Compensation Resources, Inc. can help your company with Non-Qualified Stock Options (NQSOs), please contact us or call us directly to speak with one of our Compensation Consultants at 877-934-0505.