Q. Explain about Tax Ramifications?

i) Exercise price effects capital gains of individual and effects compensation expense used by corporation for calculating company's compensation expense for tax purposes,

ii) Tax ramifications - company

(1) Discounted options which become vested on or after January 1, 2005 are subject to non-qualifying deferred compensation rules - Holder is needed to select a fixed exercise date no later than December 31, 2006 or be subject to immediate taxation on vesting, a 20 percent penalty and an interest assessment.

(2) May cause the loss of tax deductions under Section 162 (m), deduction that public companies take for compensation to chief executive officer and next four highest compensated officers is limited to $1 million each. Deduction for stock options in not usually limited. Though, discounted options don't qualify as performance based compensation and hence the deduction that company would get may be completely or partially lost. Additionally discounted stock options don't qualify for Incentive Stock option (ISO) treatment. (ISO there is no payroll tax or withholding requirements for ISO's) - If company mistakenly treats backdated stock as an ISO the company my fail to meet payroll tax and income tax withholding requirements.