Have Start-Up Equity? Don't Forget About AMT

How to calculate AMT now to save yourself from a visit from the IRS later
“Like why don’t school teach more mathematics?/Less trigonometry and more about taxes”
Big Sean “24k of Gold” Detroit (2012)

What is the AMT and why should I care?

What is AMT?
The alternative minimum tax or AMT is a parallel tax system that ensures that you can’t claim so many deductions that you don’t pay your fair share of taxes.

What is the difference between AMT and ordinary income tax?
Every time you file your taxes, your taxes are calculated using the ordinary income tax method & AMT. The IRS wants you to pay the higher of the two calculations.

Why should I care? My options are not income.
Technically, your ISO options granted are not counted as income, but when you exercise your options, generally, when you leave the company, the value difference between the fair market value price and the strike price is counted as income under the AMT system.

If you are not informed about this and are not careful in your exercise strategy, you could be in for a considerable tax bill surprise the following year when you file taxes.

What can I do about it?
Get informed and learn about the AMT system; I’ve attached a list of key
.
Estimate your AMT exposure. Use the calculator below to understand approximately how big of an impact this could have on your finances
Plan, plan, plan. You need to advocate for yourself, so start writing down a plan and get in touch with a CPA if required to plan your future.

How do I calculate AMT?

Now that you have read the resource section, here is how to calculate AMT. Please note that this is not an exhaustive AMT calculation. The below estimate will apply for 95% of cases, and if you have a more complex issue, you likely already have an outstanding CPA who will take care of this matter.

The calculation below assumes income from wages + ISO exercise. It does not include capital gains or other types of income.

Select Key Assumptions:

1️⃣ Select Filing Status:

🛠️
Joint Filers
2️⃣ a . Select Gross Filing Income (ex: Salary + Bonus)

0000
330
🛠️
$330,000


2️⃣ b . Enter Tax Deduction

🛠️ Enter Custom Amount:
🛠️ Deduction used in Calculation
$25,100
3️⃣
Fair Market Value / 409a at Exercise

🛠️
10

4️⃣
Select Option Grant Details

Add Option Grant Detail
Options (Enter info in blue cells)
0
Grant Name
Grant Date
# of Options
Exercised Options
Strike Price
WA Strike Price
Spread
AMT Gain
1
Initial
1/1/2018
100,000
50,000
$2.50
$3.18
$6.82
$341,000
2
Promotion
1/1/2020
25,000
10,000
$5.50
$3.18
$6.82
$68,200
3
Refresh
1/1/2021
10,000
2,500
$7.50
$3.18
$6.82
$17,050
There are no rows in this table
3
Count
135,000
Sum
62,500
Sum
$3.18
Average
$6.82
Average
$426,250
Sum

Note: Do not leave blue cells empty. Enter 0 if no data is required.
5️⃣
Cash Required / Federal AMT + Exercise

Cash Required
1
Fed AMT Tax Payable
Options Exercise Cost
Total Cash Required
1
$114,487
$198,750
$313,237
There are no rows in this table
Chart of Cash Required
1
Created with Highcharts 7.2.2Cash RequiredOptions Exercise CostFed AMT Tax Payable$050k100k150k200k250k
Note: Based on the state you live in - you might be liable for state AMT taxes. ex: California is 6.65% after certain exemptions.

Conclusion:

This calculator is meant to provide a high-level indication of how much cash outlay you need. More tools are coming online that helps make this decision easier.

From an individual perspective,
has built an excellent (Free) product to calculate AMT down to the detail and provides other insights on when to exercise and perform scenario planning. If you are short on cash to exercise, they also have funding options that could be useful for many.

From a company perspective,
is an excellent equity management tool and has launched various new products that specifically tackle AMT issues. Head of Legal/Finance/Accounting folks should strongly consider that platform and if you are an employee, lobby your leaders to move to more employee-friendly platforms.

Deciding on when to exercise and how much to exercise is a very personal decision. I hope this guide helps kickstart your planning process.

Disclosure: I have no financial affiliation with Carta or SecFi — they are just excellent products!


AMT Resources
0
IRS
Modified on
4/1/2021, 12:55 AM
SecFI
Modified on
4/2/2021, 1:25 PM
This Matter
Modified on
4/1/2021, 12:54 AM


Disclaimer: Don’t take tax advice from a stranger on the internet; this article is not tax advice. Please consult your CPA or Tax Attorney for your specific situation. 💸

About Me:

has 10+ years in Full-Stack Finance. Raised >$500M in multiple rounds, responsible for comprehensive projects spanning fundraising, strategy, headcount planning, traditional FP&A, operational planning, and financial analytics.




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