3616 / What are the tax implications of ISOs for employers?

An employer granting an ISO is not entitled to an income tax deduction with respect to the option on its grant or its exercise.¹ The amount received by the employer as the exercise price will be considered the amount received by the employer for the transfer of the ISO stock.² If the employee disposes of the stock prior to the end of the requisite holding period, the employer generally may take a deduction for the amount that the employee recognized as ordinary income in the same year in which the employee recognizes the income.³

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1. IRC § 421(a)(2).

2. IRC § 421(a)(3).

3. IRC § 421(b).