Harris Corporation granted Tyler 1,000 stock appreciation rights in 2013 when the stock was selling for $25 per share. In 2018, when the stock is selling for $60 per share, Tyler exercises these rights. How much income does Tyler recognize and in which year?

Question

Quizplus · Accepted Answer

Stock appreciation rights (SARs) are a type of employee compensation in which an employee is granted the right to receive the appreciation in the value of a certain number of company shares over a specific period of time. In this case, Tyler was granted 1,000 SARs, which means he has the right to receive the appreciation in value of 1,000 shares of Harris Corporation stock.

The amount of income Tyler recognizes depends on when he exercises his SARs. When Tyler exercises his SARs, he receives a cash payment equal to the difference between the stock's fair market value on the date of exercise and the stock's fair market value on the date of grant. In this case, when Tyler exercises his SARs in 2018, the stock is selling for $60 per share, which is $35 more than the $25 per share price when the SARs were granted in 2013.

Therefore, when Tyler exercises his SARs in 2018, he will recognize $35,000 in income (1,000 SARs x $35 per share appreciation) on his 2018 tax return. Tyler would not recognize any income in 2013 when the SARs were granted because he did not exercise them at that time.

Harris Corporation Granted Tyler 1,000 Stock Appreciation Rights in 2013