By Jeff Weinkle and Mitchell Kopelman
Late last year, the IRS released final regulations that require corporations to report the exercise of incentive stock options. The new rules require both public and private corporations to file an information return with the IRS for the year an option is exercised.
Prior to 2010, there were no formal reporting requirements and corporations were only obligated to provide the employee the fair market value (FMV) of an exercised incentive stock option. The actual gain from exercising an incentive stock option is not taxed until the shares are sold.
However, taxpayers have been required for years to include the excess of the FMV over the cost of the exercised option as an adjustment to income for Alternative Minimum Tax (AMT). In 2009, this excess was reflected on line 15 of IRS Form 6251 to compute AMT.
Beginning in 2010, any corporation that transfers shares due to the exercise of an incentive stock option must report details of the transaction to the Internal Revenue Service on new IRS Form 3921. The information on this form will likely be matched to the tax returns of exercising shareholders to ensure that AMT is correctly computed.
IRS Form 3921, “Exercise of an Incentive Stock Option Under Section 422(b),” requires the following information:
‐ The name and identification number of the corporation transferring the stock;
‐ The name and social security number of the employee who exercised the shares;
‐ The date the option was granted to the person;
‐ The date the option was exercised by the person;
‐ The exercise price per share;
‐ The fair market value of a share of stock on the date the option was exercised; and
‐ The number of shares of stock transferred pursuant to the exercise of the option.
Separate forms are required for each exercise of options by an employee.
Form 3921 is similar to other IRS information returns and filed with a Form 1096 at the same time:
February 28 for paper filers or March 31 for electronic filers. The required statement to exercising employees must be sent by January 31. The final version of this form for 2010 has not been released but is expected later this year.
Although it has been mandatory to report this information to employees who exercise options in prior years, the new IRS requirements provide a check on whether the options are correctly included in employees’ AMT and impose stiff penalties on employers for late or missed filings.
Corporations that issue incentive stock options should be aware of the new rules and track the appropriate detail for filing Form 3921 at the end of the year.
If you have any questions, please contact:
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact me, however, if you have any questions regarding this matter.