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Definition

Non qualifying options

Non qualifying options are employee stock options that are taxable to the employee on exercises and tax deductible to the issuing corporation. Generally the corporation issue share at a lower price than the market price to the employee. When the option is exercised (Call option) the employer become benefited and the issuer become loser. On the amount of loss issuer receive a tax benefit, at the same time employee will have to pay tax on his benefit. We can analyze the situation with an example.

MR “X” is an employee of Ahmed group. Ahmed limited issue 200 shares to Mr. “X” at TK. 65 Per Share (Market Price 75) which will be exercised after two months from now. Current market price at the date of exercise is Tk. 85. Tax rate is 35%. After Tax loss of the firm can be seen to be

Current market price (200*85) = Tk. 17000

Exercise price (200*65)            =Tk. 13000

Amount of Loss (17000 – 13000) = Tk. 4000

Tax benefit (4000*35%)           = 1400

After Tax Loss (4000 – 1400) = Tk. 2600.

The amount of Tk. 2600 is loss to the issuer but it is gain to the employee. The issuer will receive tax benefit of the Tk. 1400 on loss, at the same time the employee will have to pay tax of Tk. 1400 on the gain.

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