Stock Option Dispositions

After shares are exercised or released, optionees can sell or transfer shares. Depending upon the option type and the holding period requirements, your company might be entitled to a tax deduction equal to the optionee's ordinary income on a disposition.

You can record and track dispositions, determine if they are disqualified, and, if you use Payroll for North America, send the ordinary income calculated on disqualifying dispositions directly to payroll for processing.

When you enter a disposition for an ISO or an ISO/SAR, the system checks the 422 plan rules defined on the Governing Body Rules - Stock Option Rules page to determine if the required holding period is met for preferential tax treatment. If the disposition does not meet the holding period requirements, the system calculates the ordinary income for the shares disposed. If the ordinary income is reported on a Form W-2, a company can take it as a tax deduction. If the disposition date meets the holding period requirements, the system does not calculate ordinary income.

Ordinary income calculated on a disqualifying disposition is based on the income method rule that is specified on the Stock Option Plan Rules - Payment/Income Methods page for ISO sales. This rule determines the price that is used to calculate the ordinary income on the disposition. The value also depends on whether the transaction is an exercise or a release, and if the optionee filed an 83b election.

Disqualifying dispositions are calculated for ISOs and ISO/SARs in these ways:

Exercise of Vested Shares

Holding Period: Calculated from the exercise date.

Ordinary Income Calculation:

[(Sale Price or Exercise FMV or lesser of the two) × Shares Disposed)] − (Grant Price × Shares Disposed)

Release with No 83b Election Filed

Holding Period: Calculated from the exercise date.

Ordinary Income Calculation:

[(Sale Price or Release FMV or lesser of the two)] × Shares Disposed) − (Grant Price × Shares Disposed)

Release with 83b Election Filed

Holding Period: Calculated from the exercise date.

Ordinary Income Calculation:

[(Sale Price or Exercise FMV or lesser of the two) × Shares Disposed)] − (Grant Price × Shares Disposed)