In 2015 Martinez Corporation granted nonqualified stock options to Shawn to buy 1,000 shares of Martinez stock at $15 per share exercisable for six years. At the date of grant, the stock was selling for $10 per share. In 2017 Shawn exercises the options when the market price is $40 per share. In 2018, Shawn sells the 1,000 shares of stock for $42 per share. How much is the deduction that Martinez Corporation is allowed and in which year?

Question

Quizplus · Accepted Answer

The deduction that Martinez Corporation is allowed is equal to the amount of ordinary income that Shawn recognizes upon exercise of the stock options. In this case, Shawn exercised the options when the market price was $40 per share, which was higher than the exercise price of $15 per share. Therefore, Shawn recognizes ordinary income of ($40 - $15) x 1,000 = $25,000 in 2017 when he exercised the options. This is the amount of the deduction that Martinez Corporation is allowed in that year. The options were granted in 2015 and the exercise occurred in 2017, so neither A nor B is correct. The sale of the stock in 2018 has no impact on the deduction that Martinez Corporation is allowed, so D is also incorrect.

In 2015 Martinez Corporation Granted Nonqualified Stock Options to Shawn