How to enter a ISO/NQSO (single) Grant - as one grant or two?

Question

ISO and NQSO have different tax implications upon exercise and sale. I have had both types of grants (and have tracked both in Quicken.) Due to IRS rules, I have two grants that are combined ISO/NQSO that I have avoided entering in Quicken trying to decide best methodology

Scenario: Company ABC. Grant# Combo-1. Vests monthly over 4 years (1/48 per month). Expires 10 years out. Due to IRS rules, at vesting some of these shares become NQSO.

Year 1: months 1-8 vested shares are ISO. month 9 is split a portion are ISO and a portion are NQSO. months 10-12 vested shares are all NQSO

Year 2: months 1-7 vested shares are ISO. month 8 is split a portion are ISO and a portion are NQSO. months 9-12 vested shares are all NQSO

Year 3 and 4 are roughly the same

In the Grant Option Wizard, the third or fourth screen in, you choose the type of Stock Option, but I also found (which I don't recall previously) in testing I was doing over the last few week, that when you exercise an option using the Wizard that on the screen after you choose which option to exercise from, you identify whether it is ISO or NQSO.

I created a test grant, entered as ISO vesting 1/48 per month over 48 months. I then did four test exercises. For all of them, to try and compare I entered FMV as $

14.18 (vs strike price of 4.18).

* exercise as hold as ISO
* exercise as hold as NQSO
* exercise and sell as ISO
* exercise and sell as NQSO

Based on the register entries and the tax summary, it seems the method works. When I create ST and LT sales (for the ISO and NQSO) I am not certain.. Does anyone see something I am missing? A different way I should be entering the grant?

Thanks again.

QWin vR61.20 b27.1.61.20

jrm · Answer

@NotACPA Thanks for the reply. When I asked an earlier question regarding handling an ISO for a company post IPO a community member indicated they found they needed to expire the original ISOs and create new ISOs effective the IPO date in order to manage the appropriate tracking, basis, etc. The situation I've described is not common, but due to the IRS rules, I am guessing other Q users have been down this path. I am mostly interested if others have done this if they found this to be suitable for their tracking of if I should  be looking at "fanagling" a method in which I create two Q-grants (one ISO, one NQSO) for these particular sets.

I understand the tax implications between the ISO and the NQSO. The tax implications will occur when the exercise (as well as sell) happens, not when the options vest. I wish to ensure that how I initially enter the grant will support what needs to happen down the road upon exercise. Based on what I am seeing within the Q wizards, I think identifying the grant as ISO (upon "grant") then identifying each exercise as ISO or NQSO based on that particular transaction is suitable. As I mentioned, I don't recall in years' past seeing that Q allowed to choose and exercise to be ISO vs NQSO, as opposed to it following suit of the underlying Grant.

NotACPA · Answer

it looks to me  like this isn't so much a Q question as it is a tax issue.  Have you discussed this with a tax professional to get their advice?

Once the tax pro tells yuo what needs to happen, we can advise on  how to record it in  Q.  But we're not (and can't be) tax professionals here.