The Independent Counsel

Corporate Finance

Qualified vs. Nonqualified Stock Options


Fast growing technology companies depend on stock options to compensate employees and encourage further strenuous growth, as illustrated by the reportedly intense opposition among Massachusetts and California technology companies to the FASB's pending proposal to charge stock options against corporate earnings.

While there wasn't much tax difference between an option under a tax qualified Incentive Stock Option Plan (an "ISOP"), and a nonqualified stock option until recently, the Clinton tax bill's top rate of 36% on ordinary income reintroduced a significant benefit for capital gains income, which remains taxable at only 28%.

Since an ISOP produces capital gains income, it seems timely to review the differences between ISOPs and nonqualified options:

Incentive Stock Options:

Nonqualified Stock Options:

Comment: Stock options, whether qualified or not, remain an attractive means of compensating and motivating employees and service providers in lieu of cash.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1994; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.