Exercise of Incentive Stock Options: New Reporting Requirements

Joe Albero, – Tax Services

As of January 1, 2010, corporations must report each incentive stock option exercise to the IRS.

Reporting Requirements

In prior years, the IRS had no reporting requirement with regard to the exercise of incentive stock options (ISOs) and employers were required to provide only an information statement to employees exercising options. Now (as of January 1, 2010), every corporation is required to file a Form 3921 with the IRS to report each exercise of an ISO during the year.

The new Form 3921 will disclose the following information to the IRS:

  • the issuing corporation’s name and identification number
  • the employee’s name and social security number
  • the date the option was granted to the employee
  • the date the option was exercised by the employee
  • 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.

Filing Deadlines

The filing deadlines for Form 3921 are similar to those of Form 1099. Deadlines are as follows:

  • January 31: Information statement must be provided to employees.
  • February 28: Deadline for paper filers to file Forms 3921 with IRS.
  • March 31: Deadline to electronically file Forms 3921 with IRS (forms must be filed electronically if taxpayer files 250 or more Forms 3921 with the IRS).

Penalties for Late Filings

Failure to timely file a Form 3921 for each ISO exercise may result in the IRS assessing a penalty of $100 per filing.

Consider a 409A Valuation

All of the reportable information is readily available except for the fair market value upon exercise for private Companies. It can be difficult for private companies to determine the fair market value of their stock. If a private Company has a valuation performed, either for 409A or fair value purposes, that valuation may be helpful in determining the fair market value upon exercise. However, exercises between valuation dates may provide difficulty, especially during periods of dramatic increases or decreases in Company stock.

The stock fair market value reported on the Form 3921 may affect the employee’s income tax liability. Unlike a non-qualified stock option, the exercise of an ISO is not deemed to be a taxable event to the option holder for regular income tax purposes. But, the spread between the option exercise price and the fair market value on the day of exercise is included as taxable income for alternative minimum tax (AMT) purposes. Therefore, an ISO exercise will increase the income tax liability for taxpayers subject to AMT. The new IRS reporting requirement will allow the IRS to match the AMT preference adjustment (as reported on the Form 3921) to the employee’s income tax return. Companies may wish to perform additional valuation work in periods of large ISO exercises so employees feel confident the reported value is appropriate.

For more information, or for assistance in complying with these reporting requirements, contact Joe Albero at Frank, Rimerman + Co. LLP.