AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
What happens when you early exercise in-the-money ISO, elect 83(b), pay AMT, then leave before all stock is vested?
Posted by: heinz, June 22, 2016 12:03AM
Hi all!

I'm considering early exercising a grant that is all in the money ISOs and filing 83(b). In this case, it's the remaining unvested portion of a grant that I've already vested a piece of and mostly exercised as they were vested, but don't think this fact is relevant to the question here.

The ISOs are in the money, so I'll owe AMT at year-end (nothing special there). Question I have is, what happens to the AMT I paid if I end up leaving before all of the early exercised shares are vested, assuming the company repurchases all unvested shares. Specifically:

1) Is this treated as 'negative' AMTI, or is it somehow a capital loss if exercise date is >1yr from repurchase date? I would assume the former given that's the character of the income 'earned' in the first place upon exercise?

2) I would assume the calculation, regardless of answer #1, is the same. This would be calculated the same way the AMTI was calculated in the first place: FMV at time of early exercise less strike price * number shares = negative AMTI.

3) Assuming I have nothing else putting me into AMT in the tax year that the shares are repurchased, I would be able to recover the difference between ordinary income tax and AMT.

4) Does the same concept apply if you early exercise in-the-money NQs? E.g. you paid ordinary tax upon exercise, so you'd have negative income upon repurchase by the company?

Thanks so much!

Re: What happens when you early exercise in-the-money ISO, elect 83(b), pay AMT, then leave before all stock is vested?
Posted by: Kaye Thomas, June 26, 2016 08:43PM
This is an area where the tax law does not work as you would logically expect. In making the 83b election available, Congress wanted to make sure it wouldn't be used as a way to shift income from one year to another, so we have a harsh rule: if you have a forfeiture, you can't claim a deduction for the income you reported when you made the election. For this purpose, a forced sale back to the company at the price you paid is a forfeiture. So, if you report $100,000 of income because of the election, pay $30,000 of tax, and then forfeit the shares, you don't get a deduction for the $100,000, and you're out the $30,000.

For discussion of this rule: []

I don't like to use these posts to promote my books, but this is a case where you may well learn something you'll be glad to know if you pick up a copy of Consider Your Options.

Kaye Thomas

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