Incentive Stock Options
Stock options that are entitled to favorable tax treatment for the holder under the Internal Revenue Code (e.g., the holder may avoid the obligation to pay taxes at the time of exercising the option and thereby deferring tax until the disposition of the stock, and along with this achieving long-term capital gains treatment instead of ordinary income treatment on the intrinsic value of the option). ISOs are also subject to certain limitations and restrictions. If the ISOs qualify for the favorable tax treatment for the option holding employee, they are also less favorable to the company. The stock option with better tax treatment for the company is called "nonqualified" and when the option holder exercises the nonqualified option, the company can take an income tax deduction as a compensation expense equal to the intrinsic value of the option. Almost all emerging companies choose to issue ISOs and nonqualified options in appropriate cases. See also Non-Qualified Stock Options.