ISO Tax Guidelines for Advisors
Although Incentive Stock Options (ISOs) are not as common as they were a decade ago, we still run into situations where financial advisors have a client or prospect that wants to take advantage of the lower AMT tax rates on these grants and optimize for tax efficiency. They turn to us for an easy way to do this. Unfortunately, there is no simple way to do an ISO/AMT tax analysis. Modeling the tax effects of ISOs is a complex process and explaining the results to clients is even harder.
We developed StockOpter Pro over a decade ago to facilitate this process, but it still takes a high level of expertise to enter all the assumptions, model the scenarios and interpret the results. However, in the course of supporting this product we've developed a 5-step approach that can avoid the high cost and brain damage associated with running a detailed tax analysis for clients with ISOs:
http://blog.stockopter.com/2012/07/employee-stock-option-tax-guidelines-for-financial-advisors/
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There seems to be a new surge in the demand for ISOs at start-ups. People are once again considering the true tax planning aspects of these awards, but without truly understanding what that planning entails. I hope people will take a look at your process to determine if it works for them.
Dan, Why do you think ISOs have become popular again at start-ups? What were they granting before just NQSOs or RSUs?
On myStockOptions.com we have a special sections devoted to ISOs, with subsections on many of the tax complexities (i.e., AMT) at:
http://www.mystockoptions.com/articles/index.cfm/secID/0C23D963-6515-498D-A03CC73F36526F10
If the interest at start ups is with the early-exercise/reverse vesting type of ISOs, see our subsection under Pre-IPO Companies on these type of grants at:
http://www.mystockoptions.com/articles/index.cfm/secID/41581377-5850-4D78-8A9B9F151643144E/catID/B7469ACD-2DD6-4A51-85D787C8D8285FC7