NCIT » Topics » Federal Income Tax Consequences

This excerpt taken from the NCIT DEF 14A filed Apr 30, 2009.

Federal Income Tax Consequences

This is a brief summary of the federal income tax aspects of awards that may be made under the Plan based on existing U.S. federal income tax laws. This summary provides only the basic tax rules. It does not describe a number of special tax rules, including the alternative minimum tax and various elections that may be applicable under certain circumstances. The tax consequences of awards under the Plan depend upon the type of award and if the award is to an executive officer, whether the award qualifies as performance-based compensation under Section 162(m) of the Code. An employee will not incur federal income tax liabilities when granted a nonqualified stock option, an incentive stock option, a stock appreciation right, or incentive stock subject to conditions or restrictions.

 

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Upon exercise of a nonqualified option or a stock appreciation right, the employee, in most circumstances, will be treated as having received ordinary income equal to the difference between the fair market value of Company stock on the date of the exercise and the option price. This income is subject to income tax withholding by the Company. No income is recognized for tax purposes when an incentive stock option is exercised, unless an employee is subject to the alternative minimum tax or sells the stock before the minimum holding period ends.

Upon lapse of restrictions on restricted stock, the employee will be treated as having received ordinary income equal to the fair market value of Company stock on that date. The employee will also be treated as having received ordinary income equal to the fair market value of any Company stock when it is received by the employee under a stock award providing for deferred payment. This income is subject to income tax withholding by the Company.

On payment under an incentive awards, the employee will have ordinary income for the amount paid. This income is subject to tax withholding by the Company.

The Company usually will be entitled to a business expense deduction at the time and in the amount that the recipient of an award recognizes ordinary income. As stated above, this usually occurs upon exercise of nonqualified options and stock appreciation rights, the lapse of restrictions on incentive stock, and payment of incentive awards and other awards with deferred payment. No deduction is allowed in connection with an incentive stock option unless the employee disposes of Company stock received upon exercise in violation of the holding period requirements. Also there can be circumstances when the deduction is not allowed for certain transfers of company stock or payments to an employee upon the exercise of an incentive award that has been accelerated as a result of a change of control.

Section 162(m) of the Code disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1 million in any taxable year for the Chief Executive Officer and any of the three other most highly compensated executive officers, other than the Chief Financial Officer, except for compensation that is performance-based under a plan that is approved by the stockholders. Under the Plan, stock options would be treated as performance-based compensation. As described above, the Committee may condition other awards under the Plan on attainment of one or more performance criteria intended to permit such awards to qualify as performance-based compensation.

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