An Employer Issues Johnny 2,000 Stock Options in Recognition of a Very

question 45

Multiple Choice

An employer issues Johnny 2,000 stock options in recognition of a very good year.These particular options vest after 24 months from the date of issuance with an exercise price of $21.00 per share.After 24 months,these shares trade in the open market at $25.00 per share,and Johnny decides to exercise his 2,000 options,generating a gain of $8,000 (minus transaction fees) .Which statement best describes Johnny's tax situation pursuant to these gains?

• A) Because these options were a bonus provided by the employer,there are no tax consequences attributable to Johnny.
• B) Because these shares are "under water," Johnny's employer is responsible for any taxes on the gains.
• C) Johnny will have to pay taxes based on the corporate tax rate.
• D) Johnny's gain will be deemed as income,but taxes will be paid at the capital gains rate.

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Definitions:

50% Bonus

A premium payment of half the worth of an item, salary, or stipulated amount as an additional reward.

Cost Recovery Deduction

A deduction that allows a taxpayer to recover the cost of an investment over time, such as through depreciation or amortization.

Interest Expense

The cost incurred by an entity for borrowed funds, which is deductible under certain conditions for tax purposes.

Property Taxes

Taxes paid by property owners, based on the value of their property, to fund public services.