Alternative Minimum Tax on Incentive Stock Options
Updated: June 4, 2003
Incentive stock options (ISOs) encourage employees to have a long-term
stake in their companies. An added benefit is the fact that the exercise
of an ISO generally does not result in a taxable event. This benefit
is in contrast to the exercise of a nonqualified stock option, which
results in the immediate recognition of income, even if the stock
acquired by exercising the option is not sold.
Both established companies and small entrepreneurial ventures use
stock options to attract and retain their employees.
The benefit of ISOs is undermined by unfavorable treatment of ISOs
for alternative minimum tax (AMT) purposes. Under the AMT, the gain
between the grant price and the exercise price is treated as a preference
item to be included in AMT income. In effect, the AMT causes an acceleration
of the taxable event for an ISO.
For regular tax purposes, there is no taxable event until the ISO
shares are sold, but the AMT causes a portion of the total tax to
be moved up to the year of exercise. This result discourages employees
from holding their options as a stake in their companies and for
the period required to obtain favorable capital gains treatment.
Because AMT calculations are complex, many employees who have exercised
ISOs but who have seen the market value of their options decline
below the exercise price, are now faced with significant AMT tax
liability without having the resources needed to meet this liability.
Software Council Position:
- Massachusetts Congressman Richard Neal filed legislation that
would limit the AMT on ISOs exercised during 2000 to the fair
market value of the stock as of April 15, 2001, or, if the stock
was sold before then, to the amount realized on that sale.
- Senator John Kerry sought to include a provision providing
AMT relief for ISOs in the Senate version of the economic stimulus
legislation, but the issue was unresolved when the Congress adjourned
at the end of 2002, without the Senate having taken up the stimulus
The Council supports enactment of legislation providing relief from
the AMT for ISOs because employees should be encouraged to acquire
and hold stock in their employers. ISOs should be subject to tax upon
their sale, not upon their exercise.
Software Council Activity:
The Software Council has collaborated with the EMC
Corporation in working with Congressman Neal and Senator John Kerry
to seek relief from the AMT for ISOs.
The Council urged all Members of the Massachusetts Congressional
Delegation to co-sponsor the legislation filed by Congressman Neal
and Senator Kerry.
The Council submitted a statement to the House Ways & Means
Committee for inclusion in the printed record of a hearing the Committee
held on Tax Code Simplification, noting that the harmful consequences
of AMT complexity adversely impact the employees of many companies,
large and small.
Forty Massachusetts companies have authorized the Council to record
their opposition to the AMT being applied to ISOs. Of these forty
companies, thirty-four grant ISOs to more than eighty per cent of