ABC Corporation awarded John 1,000 options in 2014; each option allows him to purchase one share of ABC Corporation stock for $20. The ABC stock is selling for $18 per share at the grant date. In 2016, John exercises the options when the stock's selling price was $40 per share. In 2018, John sells the stock for $50 per share. What is ABC Corporation's deduction if they are nonqualified stock options?
A) $0
B) $18,000 in 2016
C) $20,000 in 2016
D) $40,000 in 2018

Question

Quizplus · Accepted Answer

ABC Corporation's deduction for nonqualified stock options is equal to the amount of ordinary income that John recognizes when he exercises the options. The ordinary income recognized by John in 2016 is equal to the difference between the fair market value of the stock on the exercise date ($40) and the exercise price ($20), multiplied by the number of shares acquired (1,000). Therefore, ABC's deduction is $20,000 in 2016. The subsequent sale of the stock by John in 2018 does not affect ABC's deduction.

ABC Corporation Awarded John 1,000 Options in 2014; Each Option