Tax
ISO AMT
Quick definition
The AMT (Alternative Minimum Tax) liability triggered when you exercise ISOs and the spread between strike price and FMV is large.
When you exercise an ISO, you don't pay ordinary income tax — but for AMT purposes, the spread between exercise price and current FMV (e.g., $0.10 strike vs $5 409A = $4.90 spread per share) is treated as preference income. On 10,000 shares, that's $49,000 in 'phantom income' you'd pay ~28% AMT on. The AMT paid becomes a credit recoverable in future years. Model AMT carefully before exercising — many founders cash-out-stress at exercise time.
Related tax terms
R&D Tax Credit
Federal credit for qualified research expenses, usable against payroll tax by startups.
Delaware Franchise Tax
Annual tax for Delaware corporations, often quoted wildly too high if calculated incorrectly.
Nexus (Sales Tax)
The connection with a state that triggers a tax-collection obligation.
QSBS (Qualified Small Business Stock)
Tax exemption for gains on qualifying startup stock held 5+ years.
Frequently asked questions
- What is ISO AMT?
- When you exercise an ISO, you don't pay ordinary income tax — but for AMT purposes, the spread between exercise price and current FMV (e.g., $0.10 strike vs $5 409A = $4.90 spread per share) is treated as preference income. On 10,000 shares, that's $49,000 in 'phantom income' you'd pay ~28% AMT on. The AMT paid becomes a credit recoverable in future years. Model AMT carefully before exercising — many founders cash-out-stress at exercise time.
- Why is ISO AMT important for startups?
- ISO AMT is a tax concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does ISO AMT belong to?
- ISO AMT is a Tax term in the StartupCFO finance glossary — alongside other tax concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about ISO AMT?
- Beyond this definition, see the related tax terms below, or explore StartupCFO's insights and tools that put ISO AMT in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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