The Alternative Minimum Tax (AMT) can apply to current and former employees of privately held companies when they exercise their incentive stock options (ISOs) if the fair market value is higher than the exercise price. The AMT can have a significant cash impact on those who exercise their ISOs.
Holders of non-qualified stock options (NSOs) are subject to tax at exercise if the fair market value of the stock is higher than the exercise price ("spread"). If you leave a company and negotiate an extension on your exercise period that is longer than 90 days after your final day of employment, then your ISOs will become non-qualified stock options. NSOs are more typically associated with non-employees such as contractors and outside business partners. Moreover, employers are required to withhold at least 25% of the spread at the time of the exercise. This withholding includes federal, medicare, FICA, and applicable state income taxes.
Since the cost of exercising stock options could already be very high, the addition of taxes makes the entire investment more burdensome as well as risky. A solution for reducing this is risk is obtaining an advance from the ESO Fund to cover the entire cost of exercising your stock options, including the tax. An indirect benefit of letting ESO finance your option exercise is getting a disqualifying disposition that can eliminate much if not all of the AMT and reduce your overall tax liability. Conceptually, ESO is obtaining your stock via your stock options and then reissuing a stock option back to you. In effect, you now have new stock options with unlimited upside potential, no expiration date, and little or no tax liability to achieve this. If you exercised your ISO stock options earlier this year and are concerned with the tax burden next year, then ESO is an ideal solution since the AMT problem is solved AND your cost of the original exercise is also refunded to you. The main catch is that your ESO transaction must occur during the same tax year in order to qualify for an AMT disqualifying disposition. Another potential benefit is having AMT credits for subsequent years when you are not subject to AMT. This is a very common result because many people only trigger AMT during the year in which they exercise a large block of stock options.
No payments are due under ESO's program unless and until there is a liquidity event involving the company that issued the shares, such as a sale or IPO. At that time, the owner of the stock and ESO share the upside of the liquidity event and ESO is repaid. For more information regarding how ESO can benefit you, please contact us at the ESO Fund.
First calculate your tax the regular way. Add the following together:
The sum of the above items equates to your AMT taxable income. Then calculate the AMT by multiplying by 26% the income amount up to $182,500 ($91,250 filing single) plus 28% of the amount over $182,500. Then be aware of the complete phase out threshold where you don't even get the standard exemption. The threshold is $328,500 for Single filers, $484,900 for Married filing Jointly, and $242,450 for Married filing Separately. So you now pay the IRS the greater of your regular tax or the AMT.
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San Mateo, CA 94404
tel: +1 (650) 262-6670