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Date:   Thu, 23 May 2002
From:   Annamarie

I'd like to know if a 1 year cliff in vesting affects the 100,000 ISO limitation. Is the yearly limitation applied to how much vests each year or how much can be exercised?

Answer

Date:   Wed, 29 May 2002

Hello Annamarie,

According to Internal Revenue Code Section 422(d), an employee is limited to $100,000 in stock, based on the fair market value on the grant date, exercisable for the first time during a calendar year. Any options exceeding the $100,000 limit are treated as non-qualified options.

These rules are explained in Treasury Notice 87-49.

It appears vesting does not affect whether the options qualify, although most plans don’t permit exercising the options until they are vested.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.